In the aggregate demand/aggregate supply model, an increase in a country's sustainable potential output is represented by
A) an increase in aggregate demand.
B) a decrease in aggregate demand.
C) an increase in long-run aggregate supply.
D) an increase in the general level of prices.

Question

Quizplus · Accepted Answer

An increase in a country's sustainable potential output represents an increase in the economy's productive capacity. This is reflected by an increase in long-run aggregate supply (LRAS) curve. The LRAS curve shifts rightward, indicating an increase in the quantity of goods and services that can be produced at every price level. There is no necessary change in aggregate demand, which is a separate curve representing the total demand for goods and services in the economy at different price levels. A change in the general level of prices (i.e. inflation) may or may not occur, depending on how aggregate demand responds to the increase in potential output.

In the Aggregate Demand/aggregate Supply Model, an Increase in a Country's