Question

Which of the following is capable of increasing real GDP in the long run?

Answer 1

Answer: Option (c) is correct.

Explanation:

Correct Option - An increase in the state of technology.

The aggregate supply curve in the long run is a vertical line and parallel to the y-axis. |t is perfectly inelastic in the long run.

Now, if there is increase in the money supply in the economy then this will increase the aggregate demand in the short run. Hence, aggregate demand curve shift rightwards, as a result real GDP increases in the short run and move beyond the potential level of real GDP.

Also, there is a creation of inflationary gap in the economy, as a result real GDP shifts back to its initial position at potential real GDP. So, there is no increase real GDP in the long run.

Similarly, decrease in interest rates and an increase in government spending will also results in inflationary gap in the economy. Therefore, doesn't affect the real GDP in the long run.

But an increase in the state of technology is capable of increasing real GDP in the long run. Improvement in the state of technology will shift the long run aggregate supply curve rightwards, as result there is an increase in potential GDP in the long run.