The long-run aggregate supply curve is vertical because
A) many inputs are fixed.
B) it incorporates the assumptions of Keynesian theory.
C) the economy will gravitate to the position of full employment when all variables are flexible.
D) wages, prices, and interest rates are not flexible in the long run.

Question

Quizplus · Accepted Answer

In the long run, all variables are assumed to be flexible and the economy will gravitate towards the full employment level of output. Therefore, the long-run aggregate supply curve is vertical at potential output level. Inputs and prices adjust fully in the long run, and thus a vertical supply curve represents the economy's potential output level unaffected by temporary shocks or stimulus. The choices A, B, and D are incorrect because they do not explain why the long-run aggregate supply curve is vertical.

The Long-Run Aggregate Supply Curve Is Vertical Because