The long run aggregate supply curve is a vertical line representing an economy’s maximum sustainable output at potential GDP, where all prices and wages have fully adjusted to economic conditions.
What is the Phillips curve in economics?
The Phillips curve is a graphical representation showing that lower unemployment often leads to faster wage growth, originally documented by economist A. William Phillips.
Here’s the thing: it shows an inverse relationship between unemployment and wage changes. For example, if unemployment drops from 5% to 4%, wage growth might jump from 3% to 5% annually as companies scramble to hire scarce workers. This idea shaped economic policy for decades, though its reliability took a hit after the 1970s stagflation period. Now, economists argue this relationship weakens when people’s inflation expectations shift or when supply shocks hit—like when oil prices suddenly spike.
Why is the long-term aggregate supply curve vertical?
The long-run aggregate supply (LRAS) curve is vertical because, in the long run, all prices—including wages and input costs—fully adjust to changes in the overall price level, leaving no incentive for firms to alter output.
Think about it this way: when an economy’s at full employment, production can’t exceed potential GDP, even if prices rise. Imagine every U.S. factory running nonstop with every worker employed—extra demand won’t create more output, just higher prices. That’s the classical view: markets eventually correct themselves. But this assumes no stubborn obstacles like labor market frictions or policy barriers. Changes in tech, workforce size, or capital investment can shift the LRAS rightward, typically boosting potential GDP by 2–3% yearly in developed economies.
Why does the long run aggregate supply curve appear vertical on a quizlet?
The long-run aggregate supply curve is vertical because wages and prices are fully flexible in the long run, meaning real wages adjust to match productivity and labor market conditions.
In the long term, nominal wages rise or fall to keep pace with inflation, so companies’ real labor costs stay stable regardless of price changes. That pins output to potential GDP—the economy’s max sustainable level given current tech and resources. For instance, the U.S. Congressional Budget Office pegs potential GDP growth at about 1.8% annually through 2026. This steady output level acts as the foundation for long-term economic planning.
Which statement about the long run aggregate supply curve is accurate?
The long-run aggregate supply curve is independent of the price level, meaning output doesn’t budge when prices move up or down.
Why? Because input costs (like wages) adjust in lockstep with prices, keeping real profits steady. Say gas prices skyrocket—airlines pay more, but they can hike ticket prices too, so their real revenue per passenger barely changes. The LRAS shifts when productivity improves (like better tech), labor grows (say, through immigration), or capital expands (new factories). A 10% productivity boost might slide LRAS right by 5%, lifting potential GDP from $26 trillion to $27.3 trillion in nominal terms. This straight-up-and-down shape stands in sharp contrast to the short-run curve, which slopes upward thanks to sticky prices.
