Question : The long-run aggregate supply curve is primarily determined by:
Option 1: Labor market conditions
Option 2: Price level
Option 3: Government policies
Option 4: Interest rates
Correct Answer:
Labor market conditions
Solution : The correct answer is (a) Labor market conditions.
The long-run aggregate supply (LRAS) curve is primarily determined by labor market conditions. It represents the level of real output an economy can produce when all resources, including labor, are fully utilized and there are no supply-side constraints.
Labor market conditions, such as the quantity and quality of labor, productivity, skills, and technological advancements, play a crucial role in determining an economy's productive capacity in the long run. A larger quantity of skilled and productive labor, along with technological advancements, can increase an economy's potential output.
Changes in labor market conditions can shift the LRAS curve. For example, an increase in the labor force due to population growth or immigration can shift the LRAS curve to the right, indicating an increase in potential output. Similarly, improvements in labor productivity or technological advancements can also shift the LRAS curve to the right.
