Economics • Economic BasicsHard
What does a horizontal long-run aggregate supply (LRAS) curve imply under the Keynesian perspective?
A. The economy is at full employment and output cannot increase without inflation.
B. Prices are completely flexible and output is determined solely by supply-side factors.
C. There is substantial underutilized capacity and unemployment, allowing output to expand without driving up the price level.✓ Correct Answer
D. Inflation and unemployment are inversely related in the long run.
💡 Solution & Explanation
In extreme Keynesian economics, a horizontal long-run aggregate supply curve reflects an economic depression where massive unemployment and idle capacity allow output to expand without raising price levels. Classical models instead argue for a vertical supply curve determined strictly by factor endowments. This horizontal phase underpins traditional arguments for active fiscal stimulus during recessions.
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