Question

Why is the LAS curve vertical? LO4

   Why is the LAS curve vertical? LO4

Macroeconomics

David Colander 8th Edition

Chapter 10, Problem 10

Instant Answer

Solved by Expert Crystal Wang

01/17/2024

Step 1

The LAS curve represents the relationship between the total quantity of goods and services that firms in an economy are willing to produce and sell at different price levels, assuming that all input prices, including wages, have fully adjusted to any changes in Show more…

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Why is the LAS curve vertical? LO4

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Key Concepts

Classical Dichotomy

The concept of the classical dichotomy separates real variables from nominal variables. In the long run, real output depends solely on genuine economic factors like labor supply and capital accumulation, while nominal factors such as the money supply may influence only the price level. This principle underlies the vertical long-run aggregate supply curve, as changes in nominal variables do not affect the economy's real productive capacity.

Price and Wage Flexibility

In the long run, prices and wages are assumed to be fully flexible. This flexibility allows any short-run deviations caused by nominal rigidities to adjust, ensuring that the economy operates at its full capacity. As a result, any changes in aggregate demand only affect the price level and not the real level of output, reinforcing the vertical nature of the LAS curve.

Long-Run Aggregate Supply (LAS) Curve

The long-run aggregate supply curve represents the economy's maximum sustainable output level when all resources are fully employed. It is vertical because, in the long run, the overall price level does not affect the economy's productive capacity, which is determined by factors like technology, resource availability, and institutional configurations rather than by demand-side variations.

Potential Output (Full Employment Output)

Potential output refers to the level of output an economy can achieve when utilizing its resources efficiently without triggering inflation. Since it is based on real factors such as labor, capital, and technology, changes in the price level do not alter this capacity, making the aggregate supply in the long run independent of prices and thus depicted as vertical.

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