Question

The long-run aggregate supply curve is represented by a vertical line at the solow growth rate because?

Answer 1

The long-run aggregate supply curve is represented by a vertical line at the Solow rate of growth because there is an underlying assumption of long-run money neutrality.

The long-run aggregate supply (LRAS) curve shows the connection between the price level and the real GDP provided all the prices were flexible. Solow growth refers to the economic process of the country in the long-run in which total saving is used for capital growth.

The LRAS curve may be a vertical line at the Solow growth because it is assuming a full-employment outcome. Vertical line on a graph implies that price index and GDP are not related anymore at the Solow growth. That's the real GDP at this potential output refers to the economy's maximum sustainable capacity. within the long-run, the important GDP is not related to the price level. it's only affected by the quantity of country's resources and production.

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