The long-run aggregate supply of an economy at the potential level of real GDP is graphically represented by:
A)a horizontal line.
B)an upward-sloping curve.
C)a downward-sloping curve.
D)a vertical line.
E)a backward bending curve.

Question

Quizplus · Accepted Answer

The long-run aggregate supply curve (LRAS) represents the potential output of an economy, which is determined by the availability of inputs, technology, and institutions. In the long-run, all input prices are flexible and can adjust to changes in output and demand. Therefore, the LRAS curve is vertical, indicating that changes in aggregate demand do not affect the potential level of output. Any increase in aggregate demand will result in higher prices, but no increase in output beyond the potential level. Conversely, any decrease in aggregate demand will result in lower prices, but no decrease in output below the potential level.

The Long-Run Aggregate Supply of an Economy at the Potential