Long-Run Aggregate Supply (LRAS)

An outward PPC shift means more resources or better technology: more of both goods is possible.

• Correct: The economy can produce more of both goods:
• The economy is using fewer resources:
• Unemployment has risen:
• Prices have risen:

With sticky wages, a higher price level makes extra output profitable.

• Correct: Nominal wages and some prices are sticky in the short run:
• Households buy more when prices rise:
• The government raises spending when prices rise:
• Firms' costs rise as fast as prices:

Potential (full-employment) output is the real GDP produced when unemployment is at its natural rate.

• Correct: Real GDP when the economy is at full employment:
• The highest real GDP ever recorded:
• Real GDP in a recession:
• Nominal GDP divided by population:

When wages and prices all adjust, a change in the price level changes costs as much as revenues, so output returns to potential: LRAS is vertical at full-employment output.

• In the long run firms are unable to raise their prices, so they stop expanding output: In the long run every price can change. It is because all prices and wages adjust that output does not respond.
• In the long run the economy runs out of extra workers, so firms stop hiring more: Output can rise above full employment for a time. The curve is vertical because wages catch up in the long run.
• Correct: Wages and prices fully adjust, so output depends on resources, not the price level: Right: once nominal wages catch up with prices, a higher price level no longer makes more output profitable.
• In the long run demand for goods stops changing: Demand changes in the long run too. The vertical curve is about supply once wages adjust.

In the long run, the price level and all input prices move together, so real output is at potential whatever the price level: that is LRAS.

• It doubles, because prices doubled: Higher prices raise output only while wages are stuck. Once wages double too, output is back at potential.
• It falls by half, because goods are twice as expensive: Incomes doubled as well. In the long run, output is set by resources, not by the price level.
• It rises above full employment for good: Output above full employment cannot last once wages and input prices adjust.
• Correct: It stays at full-employment output: Right: costs rose as much as prices, so production is no more profitable than before.

Better technology raises what full employment of resources can produce, so LRAS shifts right.

• Key: long-run aggregate supply shifts right

Lost capital lowers full-employment output (LRAS left) and raises production costs at every price level now (SRAS left).

• Key: long-run aggregate supply shifts left; short-run aggregate supply shifts left

A point on the PPC is full employment of resources; that output is where LRAS stands. Both move with resources and technology.

• Correct: Both show capacity: as LRAS shifts right, the PPC shifts out: Right: more resources or better technology move both.
• When LRAS shifts right, the PPC shifts inward: More capacity moves the PPC out, not in.
• LRAS shows planned spending, while the PPC shows production: LRAS is supply: full-employment output. Spending is AD.
• They are unrelated, because a PPC is about two goods rather than total output: The two goods on a PPC stand for all the economy makes, and its frontier moves with LRAS.

In the long run nominal wages and input prices adjust to the price level, so output returns to full employment at any price level.

• An answer that earns the point: In the long run, nominal wages and input prices adjust with the price level, so a higher price level makes production no more profitable than before. Because costs rise as much as prices, real output stays at full-employment output.