Economics • Economic BasicsEasy
What does a horizontal long-run aggregate supply curve imply in macroeconomic theory?
A. Output is fixed at potential GDP regardless of the price level
B. Prices are completely inflexible in the short run
C. The economy is operating at extreme levels of unemployment with constant price levels✓ Correct Answer
D. Money supply has no impact on real output
💡 Solution & Explanation
A horizontal long-run aggregate supply curve reflects the extreme Keynesian view where severe resource underutilization exists, allowing output to expand without driving up the price level. Alternative interpretations involving potential GDP assume a vertical curve, while price inflexibility relates to short-run models rather than standard long-run vertical depictions. Keynesian cross models historically emphasize this horizontal region during deep depressions. Gross domestic product calculations depend heavily on accurate price deflators to isolate real output changes from nominal shifts.
More Economics Economic Basics questions
- What does the term 'Opportunity Cost' refer to in microeconomics?
- What does the 'Coase Theorem' propose regarding externalities in economic transactions?
- What is the primary economic activity that forms the foundation of the rural economy in Arunachal Pradesh?
- What is the primary analytical objective of the 'Real Business Cycle Theory' in modern macroeconomics?
- Which of the following describes the 'Laffer Curve' in public economics?