Economic growth due to labor force expansion or capital investments will result in I. A leftward shift of short-run aggregate supply.
II) A rightward shift in long-run aggregate supply.
A) I only
B) II only
C) Both I and II
D) Neither I nor II

Question

Quizplus · Accepted Answer

Economic growth due to labor force expansion or capital investments will lead to an increase in the potential output of an economy, which means an increase in the long-run aggregate supply. However, this increase in output may not be immediate due to time lags in adjusting capital stock or in the training of new workers, leading to a smaller increase in the short-run aggregate supply. This means that there will be a rightward shift in long-run aggregate supply (II) but a leftward shift in short-run aggregate supply (I). The correct answer is therefore only II (B).

Economic Growth Due to Labor Force Expansion or Capital Investments