ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The higher interest rates will lower investment spending and hence the capital stock. A lower capital stock leads to a decrease in long-run aggregate supply.

Detailed explanation-2: -Hence, the overall result will increase potential output (rightward shift in LRAS). This is because an increase in aggregate demand and labor supply allows supply and demand to increase in tandem, moving to a higher equilibrium.

Detailed explanation-3: -Lower interest rates make it cheaper to borrow. This tends to encourage spending and investment. This leads to higher aggregate demand (AD) and economic growth.

Detailed explanation-4: -An increase in the production factors causes the curve to shift to the right, while a decline in the production factors will lead to a leftward shift. The primary production factors that cause the changes in the LRAS curve include labor productivity levels, workforce size, capital size, and education levels.