Increase in Sustainable Potential Output in the Aggregate Demand/Aggregate Supply Model

Increase in Sustainable Potential Output

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Question

In the aggregate demand/aggregate supply model, an increase in a country's sustainable potential output is represented by an increase in

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A. B. C. D.

Explanation

Changes in long run aggregate supply affect the economy's long run potential output. Changes in short run aggregate supply do not affect the long run potential of the economy.

In the aggregate demand/aggregate supply (AD/AS) model, which is used to analyze the overall economy, an increase in a country's sustainable potential output is represented by an increase in the long-run aggregate supply (LRAS). Therefore, the correct answer is D.

The AD/AS model helps explain the relationship between the overall demand for goods and services in an economy (aggregate demand) and the supply of goods and services by all producers (aggregate supply). It is important to note that the AD/AS model incorporates both short-run and long-run perspectives.

In the short run, the level of output in an economy can deviate from its sustainable potential due to various factors such as changes in consumer spending, business investment, government spending, or net exports. These factors affect the aggregate demand curve, which represents the total demand for goods and services at different price levels.

However, in the long run, the economy tends to move towards its sustainable potential output level, which is determined by the available factors of production such as labor, capital, and technology. The LRAS curve represents the level of output that an economy can sustainably produce over time, assuming full utilization of its factors of production.

When there is an increase in a country's sustainable potential output, it means that the economy can produce more goods and services in the long run. This increase is typically driven by factors such as technological advancements, improvements in infrastructure, or growth in the labor force. As a result, the LRAS curve shifts to the right, indicating an increase in the sustainable potential output level of the economy.

Therefore, an increase in sustainable potential output is represented by an upward shift of the LRAS curve in the AD/AS model. This shift indicates that the economy is capable of producing more output at the same price level, without causing inflationary pressures or excessive increases in prices.

In summary, an increase in a country's sustainable potential output is represented by an increase in the long-run aggregate supply (LRAS) in the aggregate demand/aggregate supply (AD/AS) model.