Why is the long-run aggregate supply curve vertical at potential real GDP?
A) Resource costs adjust fully to price changes.
B) Producers' profits are increasing at this point.
C) Unemployment equals zero.
D) There is a very strong relationship between further price changes and output produced.
E) Production costs are at the lowest level possible.

Question

Quizplus · Accepted Answer

In the long run, resource costs, such as wages and raw materials, are fully adjusted to price changes, meaning that firms have no incentive to alter their production decisions in response to price changes. As a result, the long-run aggregate supply curve is vertical at potential real GDP, indicating that any increase in aggregate demand will only lead to an increase in prices, with no effect on output.

Why Is the Long-Run Aggregate Supply Curve Vertical at Potential