The level of potential output and location of the long-run aggregate supply curve are determined by
A) Federal Reserve policy.
B) the price level.
C) the intersection of aggregate demand and short-run aggregate supply.
D) the natural rate of unemployment.

Question

Quizplus · Accepted Answer

The level of potential output and the location of the long-run aggregate supply curve are primarily determined by the natural rate of unemployment, which is the rate of unemployment that exists when the economy is at full employment and there are no cyclical factors affecting the unemployment rate. The long-run aggregate supply curve is vertical at potential output, which is determined by the factors of production such as the labor force, capital stock, and technology. Therefore, the natural rate of unemployment and the capacity of the economy to produce goods and services are the main determinants of potential output and the long-run aggregate supply curve.

The Level of Potential Output and Location of the Long-Run