Chapter 7R, Problem 25MCQ

To determine

The correct option that is true about the potential output level if LRAS curve showing economic growth.

Answer to Problem 25MCQ

Option a is correct.

Explanation of Solution

Explanation for correct option:

a.

Economic growth can be represented as rightward shift in the long-run aggregate supply curve. The potential or full employment level of output is increased if there is long-run economic growth prevails. Therefore, option a is correct answer.

Explanation for incorrect options:

b.

Decrease in potential output level in long-run represents the economic downturn instead of growth. Therefore, option b is incorrect.

c.

If the output level is increased from it potential level then it happens in short-run aggregate supply curve. Therefore, option c is incorrect.

d.

If output level is decreased from its potential level then it happens due to short-term fluctuations. Therefore, option d is incorrect.

e.

Potential output level is increased that can be shown by shifting LRAS towards right side. Therefore, option e is incorrect.

Economics Concept Introduction

Long-run aggregate supply curve: As per long-run aggregate supply curve, the aggregate output supplied remains unchanged even if aggregate price level is increased or decreased.