ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The long-run aggregate supply curve is vertical because, in the long run, the general level of prices and wages does not impact the economy’s capacity to generate goods and services as they are flexible.

Detailed explanation-2: -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-3: -Wages rise at a slower rate than the inflation rate. The SRAS will increase, but the LRAS will be unchanged.

Detailed explanation-4: -The Keynesian LRAS In the diagram, the LRAS is perfectly elastic (horizontal) if the economy has high unemployment of resources (before Y1). More output can be produced without an increase in costs of production and the price level, P1. At low output, firms can attract more resources without bidding up their prices.

Detailed explanation-5: -Keynesian view of long run aggregate supply Keynesians believe the long run aggregate supply can be upwardly sloping and elastic. They argue that the economy can be below the full employment level, even in the long run. For example, in recession, there is excess saving, leading to a decline in aggregate demand.