The long-run aggregate supply curve
A) shifts to the right when there is a tax increase.
B) indicates the level of output (GDP) that occurs when resources are fully employed.
C) indicates that an increase in the overall price level will cause an increase in production.
D) shifts to the right when the Federal Reserve increases the money supply.

Question

Quizplus · Accepted Answer

The long-run aggregate supply curve represents the level of output (GDP) that occurs when resources are fully employed, meaning that all factors of production are utilized at their highest potential. This is because in the long-run, prices and wages are fully adjustable, allowing firms to adjust their production levels accordingly. Therefore, the long-run aggregate supply curve is vertical at the potential GDP level, indicating that an increase in the overall price level will not cause an increase in production. Instead, it indicates that shifts in production are only possible through changes in technology or increases in the amount of resources available.

The Long-Run Aggregate Supply Curve