Question

The long-run aggregate supply curve is vertical:
a.because the rate of inflation is steady in the long run.
b. only when the money supply increases at the same rate as real GDP.
c. because resource prices eventually rise and fall with product prices.
d. because product prices tend to increase at a faster rate than resource prices.

Answer 1

Answer: Option(c) is correct.

Explanation:

The long run aggregate supply(LRAS) curve is vertical as resource prices eventually rise and fall with product prices.

When there is an increase in the price level of the output, so in the long run this will also result in an increases in the prices of the factors of production.

Hence, aggregate supply curve in the long run is vertical.

Vertical LRAS also shows that whatever change happen in the aggregate demand has a temporary impact on the level of output. Factors such as capital, labor, technology impact the LRAS because it was assumed that everything is used optimally.