Chapter 10, Problem 10.1LO

To determine

The concept of long run aggregate supply curve and the effects of economic growth on the long-run aggregate supply curve.

Concept information:

Economic growth rate refers to the rate at which the output of an economy increases overtime. It is used as an indicator of economic well-being of a nation. Economic growth is used as the most powerful instrument for reducing poverty and improving the standard of living of the residents of a country.

Explanation of Solution

Long-run aggregate supply curve represents the total amount of goods and services supplied in the economy in a given period of time. The long-run aggregate supply curve is vertical at full-employment level. This means that in the long-run the firms will operate at full capacity.

The equation for long-run aggregate supply curve is given by:

  $Y=Y^{*}$

Here,

  $Y^{*}$ is the full employment output.

An increase in economic growth will result in a rightward shift in the long-run aggregate supply curve from LRAS1 to LRAS2 as shown below: