The long-run aggregate supply curve is:
A) upward sloping.
B) downward sloping.
C) vertical at full-employment real GDP.
D) horizontal at full-employment real GDP.

Question

Quizplus · Accepted Answer

The long-run aggregate supply curve is vertical at full-employment real GDP because in the long run, all inputs are flexible and can be adjusted to achieve full potential output (potential output is the level of real GDP that the economy can produce at full employment). Therefore, any increase in aggregate demand (such as from fiscal or monetary policy) will only result in higher prices in the long run, but no increase in real GDP beyond potential output. Similarly, any decrease in aggregate demand will only result in lower prices in the long run, but no decrease in real GDP below potential output.

The Long-Run Aggregate Supply Curve Is