If the long-run aggregate supply curve is vertical, then changes in aggregate demand affect:
A) neither prices nor level of output.
B) both prices and level of output.
C) level of output but not prices.
D) prices but not level of output.

Question

Quizplus · Accepted Answer

If the long-run aggregate supply curve (LRAS) is vertical, it means that the economy is operating at its full potential output level and any increase or decrease in aggregate demand (AD) would only lead to a change in prices but not the level of output. This can be explained by the fact that if AD increases, there would be excess demand in the economy leading to a shortage of goods and services, which would drive up prices. On the other hand, if AD decreases, there would be excess supply in the economy leading to a surplus of goods and services, which would drive down prices. However, the level of output would remain constant in both cases as the economy is already producing at its full potential. Hence, changes in AD impact prices but not the level of output if the LRAS curve is vertical.

If the Long-Run Aggregate Supply Curve Is Vertical, Then Changes