Final answer:
The positive slope of the aggregate supply curve is explained by the incentive for firms to increase production to realize higher profits as output prices rise, provided input costs remain constant. The AS curve becomes nearly vertical at potential GDP, where full employment of resources prevents further output increase despite higher prices. The correct answer is option The correct answer is option B. The law of diminishing returns
Step-by-step explanation:
The positive slope of the aggregate supply (AS) curve can be explained by the relationship between the price level for outputs and the incentive for firms to increase production to achieve higher profits. As the price level for outputs rises while the price of inputs remains fixed, firms are motivated to produce more, which explains the upward sloping section of the AS curve. However, the AS curve becomes nearly vertical at the point where the economy reaches its potential GDP, indicating that even with higher output prices, firms cannot produce more due to full employment of labor and machinery.
At the point of potential GDP, also known as full-employment GDP, the economy is operating at its maximum capacity with machines and factories running at full capacity, and the unemployment rate is relatively low, at the natural rate of unemployment. This indicates that there are limits to how much output can be increased, even with higher prices, and is represented by the vertical section of the AS curve.