The vertical, long-run aggregate supply curve indicates that the long-run level of economic output is dependent upon
a) ?the stock of productive factors
b) ?the price level
c) ?in-kind variables
d) ?government subsidies
The Correct Answer and Explanation is :
The correct answer is a) the stock of productive factors.
Explanation:
The long-run aggregate supply (LRAS) curve is vertical, which indicates that in the long run, the total output of an economy is determined by factors such as labor, capital, and technology rather than the price level. This concept is rooted in the classical model of economics, which assumes that in the long run, an economy is at full employment and that output is at its potential level, independent of the price level.
The LRAS curve represents the economy’s maximum sustainable output, also known as potential output or full-employment output. This level is determined by the stock of productive factors, which include:
- Labor: The size and skill level of the workforce directly affect the economy’s ability to produce goods and services. Increases in the labor force or improvements in labor productivity can shift the LRAS curve to the right, indicating higher potential output.
- Capital: This includes physical capital such as machinery, infrastructure, and buildings. More capital means more capacity to produce goods and services, which increases the economy’s potential output.
- Technology: Technological advancements improve the efficiency of production, allowing the economy to produce more with the same quantity of labor and capital. Technological progress shifts the LRAS curve to the right.
- Natural Resources: The availability and utilization of natural resources, such as land and raw materials, also affect the long-term productive capacity of the economy.
The price level, on the other hand, does not affect the long-run output. In the short run, changes in the price level can influence aggregate demand and output, but in the long run, the economy’s output is constrained by the availability and productivity of these productive factors. As the economy adjusts to full employment, the LRAS curve becomes vertical at the potential output level, meaning that no changes in the price level can alter the economy’s output in the long run.
Therefore, the stock of productive factors is the key determinant of long-run economic output.