Question

The Long-Run Classical Macroeconomic Equilibrium model has a vertical Long-Run Aggregate Supply Curve. What happens to the price if the equilibrium price continues to move up the LRAS curve?

a) The average price level will continue to drop.
b) The average price level will start to rise.
c) The average price level is unaffected.
d) None of the above

Answer 1

In the Long-Run Classical Macroeconomic Equilibrium model with a vertical LRAS curve, any movement up along the curve leads to a rise in the average price level, which indicates inflation, without affecting output or natural unemployment.

Step-by-step explanation:

In the context of the Long-Run Classical Macroeconomic Equilibrium model, if the equilibrium price continues to move up along a vertical Long-Run Aggregate Supply Curve (LRAS), the average price level will start to rise. This is because the vertical LRAS curve indicates that in the long run, the economy's output is at its full capacity, and the level of real GDP is fixed. Therefore, any increase in aggregate demand represented by moving up along the LRAS curve only increases the price level, leading to inflation, but does not affect the output or the natural rate of unemployment.