ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -If the classical dichotomy and monetary neutrality hold in the long run, then the long-run aggregate-supply curve should be vertical. Economists refer to fluctuations in output as the “business cycle” because movements in output are regular and predictable.

Detailed explanation-2: -According to the classical dichotomy and money neutrality, changes in money supply will NOT AFFECT output. Indeed, according to the classical economy and the idea of money neutrality, changing the stock of money in the economy will only affect the level of prices, with no effect on output.

Detailed explanation-3: -The LRAS is vertical because, in the long-run, the potential output an economy can produce isn’t related to the price level. There are only two things that matter for potential output: 1) the quantity and the quality of a country’s resources, and 2) how it can combine those resources to produce aggregate output.

Detailed explanation-4: -The long-run aggregate supply curve is vertical because in the long run, an economy’s supply of goods and services depends on its supplies of capital, labor, and natural resources and on the available production technology used to turn these resources into goods and services.

Detailed explanation-5: -The aggregate supply curve shifts to the right as productivity increases or the price of key inputs falls, making a combination of lower inflation, higher output, and lower unemployment possible.