Question

If potential GDP is equal to $600 billion, what does the long-run aggregate supply curve look like?A) It is a horizontal line at $600 billion of GDP.B) It is a vertical line at a level of GDP below $600 billion.C) It is a vertical line at $600 billion of GDP.D) It is a vertical line at a level of GDP above $600 billion.

Answer 1

Answer:

C) It is a vertical line at $600 billion of GDP

Explanation:

Aggregate supply is the total value of goods and services that companies established in a country are willing to produce and sell for each price level over a given period of time. It is therefore the sum of the supply curves of each firm.

Potential GDP, in turn, is the value of all final goods and services produced by an economy over a given period of time when all factors of production (capital and labor) are being tapped. It is the maximum production point of an economy. In this example, the potential GDP is 600 billion.

In the long run, an increase in the general price level does not affect aggregate production. Thus the aggregate supply curve of an economy represents the sum of all supply in a situation in which all factors of production are employed. This makes the vertical aggregate supply curve at 600 billion.