Question : In the long run, the aggregate supply curve is:

Option 1: Vertical
 

Option 2: Horizontal
  

Option 3: Upward-sloping

  

Option 4: Downward-sloping

Correct Answer: Vertical

Solution : The correct answer is (a) vertical.

In the long run, the aggregate supply curve becomes more vertical or "inelastic" compared to the short run. This means that changes in the overall price level have little to no effect on the quantity of output supplied by firms.

There are a few reasons why the long-run aggregate supply curve is vertical:

1. Flexible Prices and Wages: In the long run, prices and wages become more flexible and adjust to changes in the overall price level. As a result, firms can adjust their production costs and input prices to align with changes in the price level. In this case, changes in prices do not lead to changes in real output levels.

2. Full Adjustment of Factors of Production: In the long run, firms have sufficient time to adjust their factors of production, such as labor and capital, in response to changes in market conditions. This allows firms to optimize their production processes and allocate resources efficiently, resulting in a stable level of output regardless of changes in the price level.

3. Neutrality of Money: In the long run, the concept of monetary neutrality suggests that changes in the money supply or overall price level do not have a lasting impact on real variables such as output and employment. Instead, changes in the money supply primarily affect nominal variables like prices.

Therefore, in the long run, the aggregate supply curve is vertical because changes in the overall price level do not impact the quantity of output supplied. Instead, the long-run aggregate supply is determined by factors such as technology, productivity, labor force growth, and the availability of capital.