-Refer to the above graph. Assume that the economy is initially at equilibrium at point A. If there is a recession in this economy such that AD₁ shifts to AD₂, and wages and prices are flexible, then the long-run aggregate supply curve will be:

Question

-Refer to the above graph. Assume that the economy is initially at equilibrium at point A. If there is a recession in this economy such that AD<sub>1</sub> shifts to AD<sub>2</sub>, and wages and prices are flexible, then the long-run aggregate supply curve will be: A) AS<sub>2</sub>. B) AS<sub>1</sub>. C) a vertical line at Q<sub>f</sub><sub>.</sub> D) a vertical line at Q<sub>1</sub>.

Quizplus · Accepted Answer

In the long run, the aggregate supply curve is vertical at the full employment level of output, Q_f, because wages and prices are flexible, allowing the economy to return to its potential output.

-Refer to the Above Graph