Figure 33-5.

Refer to Figure 33-5. The appearance of the long-run aggregate-supply (LRAS) curve

Question

Figure 33-5.

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Refer to Figure 33-5. The appearance of the long-run aggregate-supply (LRAS) curve

BlackTom AI · Accepted Answer

Question context: Figure 33-5 shows an LRAS vertical line, SRAS curves (SRAS1, SRAS2), AD, and some labeled output levels Y1 and Y2 with price levels P1, P2, P3. The answer options ask which statement(s) about the appearance of the LRAS curve are true.

Option 1: "is consistent with the idea that point A represents a long-run equilibrium and a short-run equilibrium when the relevant short-run aggregate-supply curve is SRAS1."
- Why this could be true: If point A lies at the intersection of the LRAS (vertical line) and SRAS1, then A corresponds to a level of output that is simultaneously compatible with the long-run potential (LRAS) and the short-run supply curve SRAS1. In many textbook diagrams, a point at the intersection of LRAS and a short-run supply curve can represent a long-run equilibrium (where price is flexible and production is at potential) that also serves as a short-run equilibrium for that particular SRAS. The statement hinges on A actually lying on both LRAS and SRAS1, indicating a simultaneous long-run and short-run equilibrium under SRAS1.
- Potential confusion to watch for: If A were not on SRAS1, or if the short-run equilibrium is elsewhere (e.g., at the intersection of AD with SRAS1), then this statement would be incorrect. The claim is conditional on the diagram showing A at the crossing of LRAS and SRAS1.

Option 2: "indicates that Y1 is the natural rate of output."
- Why this could be true: The natural rate of output is the level of real GDP corresponding to the vertical LRAS. If the LRAS is drawn at Y1, then Y1 represents potential (natural) output where unemployment is at its natural rate and real GDP is at its long-run level. This is a standard interpretation: LRAS intersects the horizontal axis at the natural output level, which, in the diagram, is labeled Y1.
- Why this is plausible: Since LRAS is vertical and anchored at Y1, labeling Y1 as this natural rate aligns with the typical teaching that potential output occurs at the LRAS intercept with the horizontal axis.

Option 3: "All of the above are correct."
- Synthesis: If both Option 1 and Option 2 hold true under the diagram’s configuration, this option would be a correct summary. The statement depends on the actual positions shown (A on the intersection of LRAS and SRAS1, and LRAS anchored at Y1). If those conditions are satisfied, then this option follows.

Option 4: "is consistent with the concept of monetary neutrality."
- Why this could be true: Monetary neutrality states that in the long run, changes in the money supply do not affect real variables like real GDP; they affect only nominal variables such as the price level. LRAS represents the economy’s long-run potential output, which is determined by real factors (labor, capital, technology) and not by the money supply. Therefore, the vertical LRAS is consistent with monetary neutrality in the sense that changes in aggregate demand (driven by money) move prices but do not shift the long-run output level.
- Important nuance: This statement speaks to a general principle rather than a specific diagram feature. It would be considered true if the diagram is illustrating the long-run view where output is fixed at Y1 despite monetary changes that affect P. The relation is about long-run outcomes, not about the exact short-run position.

Overall, evaluating each option in context:
- Option 1’s truth depends on A lying at the intersection of LRAS and SRAS1. If that is the case, this option is supported by the diagram.
- Option 2’s truth follows from LRAS being at Y1, which identifies Y1 as potential/natural output.
- Option 3 would be true only if both Options 1 and 2 are true in the given figure.
- Option 4 aligns with the standard long-run interpretation that money is neutral with respect to real output, so it is consistent with the LRAS framework shown.

Note: In this type of question, confidence rests on exactly where point A sits and how LRAS is positioned relative to Y1. If the diagram confirms A lies at the SRAS1 intersection with LRAS and LRAS is at Y1, then both 1 and 2 are true, making 3 true as a combined statement, and 4 is also consistent with monetary neutrality.

Figure 33-5. Refer to Figure 33-5. The appearance of the long-run aggregate-supply (LRAS) curve

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Figure 33-5. ​ Refer to Figure 33-5. The appearance of the long-run aggregate-supply (LRAS) curve