Why does the aggregate supply curve change from horizontal to vertical over the course of the very short run to the long run?
A)Fiscal policy works to shift aggregate supply to potential GDP.
B)Monetary policy works to shift aggregate supply to potential GDP.
C)As prices begin to adjust, businesses adjust production and the economy recovers to potential GDP.
D)The level of production in the economy reduces until a certain fixed level.

Question

Quizplus · Accepted Answer

In the very short run, the aggregate supply curve is horizontal because prices are fixed and firms are willing to supply any amount of goods at those prices. As time passes, prices begin to adjust and firms adjust their production levels accordingly, leading to a recovery of the economy towards potential GDP. This causes the aggregate supply curve to shift from horizontal to upward sloping (eventually becoming vertical in the long run) as potential GDP is reached and the economy returns to full employment. Fiscal and monetary policy may also work to shift aggregate supply, but the primary reason for the shape of the aggregate supply curve is the adjustment of prices and production over time.

Why Does the Aggregate Supply Curve Change from Horizontal to Vertical