Chapter 18, Problem 1FRQ

a)

To determine

The graph representing the LRAS curve.

Explanation of Solution

The long-run aggregate supply curve would represent as follows:

  

The graph shows the aggregate price level on the vertical axis and real GDP on the horizontal axis. In the long run, aggregate supply or output would remain the same with the price change and therefore, the curve would be a vertical line which is labeled as LRAS.

Economics Concept Introduction

Introduction: An aggregate supply refers to the total supply of goods and services at different price levels (aggregated) in the economy. In simple words, it is the total quantity that is produced and sold by firms at different prices in the market.

b)

To determine

The graph labeling potential output.

Explanation of Solution

The potential output on the graph of the long-run aggregate supply curve would represent as follows:

  

The graph shows the aggregate price level on the vertical axis and real GDP on the horizontal axis. Potential output is an output level where the economy enjoys full employment, therefore, the potential output is at the point of Y_p1 where the long-run aggregate supply curve (LRAS₁) intercepts a horizontal axis.

Economics Concept Introduction

Introduction: An aggregate supply refers to the total supply of goods and services at different price levels (aggregated) in the economy. In simple words, it is the total quantity that is produced and sold by firms at different prices in the market.

c)

To determine

The graph representing an increase in the LRAS curve.

Explanation of Solution

After an increase in the LRAS curve, the graph of the long-run aggregate supply curve would represent as follows:

  

The graph shows the aggregate price level on the vertical axis and real GDP on the horizontal axis. When there is an increase in long-run supply, then the LRAS₁ curve would shift to the right which is labeled as LRAS₂ and it represents a vertical line where the output is labeled as Y_p2. Due to an increase in factors of production such as labor, land, capital, etc. the long-run aggregate supply would also increase.

Economics Concept Introduction

Introduction: An aggregate supply refers to the total supply of goods and services at different price levels (aggregated) in the economy. In simple words, it is the total quantity that is produced and sold by firms at different prices in the market.

d)

To determine

Possible three causes that change the long-run aggregate supply curve.

Explanation of Solution

The causes of an increase in LRAS involve the increase in factors of production or a rise in the number of resources such as labor, land, capital, entrepreneurship, etc. which shifts the LRAS curve to the right because due to increase in these factors, the aggregate supply in long-run would also increase.

Moreover, an increase in the quality of resources is also the reason for the increase in LRAS which shifts the curve rightward. And, technological advancement or technological progress would be another reason for this increase as it can fasten the speed of production and provide more efficiency in manufacturing which, in turn, increase the aggregate supply in long run.

Economics Concept Introduction

Introduction: An aggregate supply refers to the total supply of goods and services at different price levels (aggregated) in the economy. In simple words, it is the total quantity that is produced and sold by firms at different prices in the market.