The reason the long-run aggregate supply curve is vertical is

Question

Multiple Choice
when both input prices and output prices are flexible, profit levels always adjust to give firms exactly the right profit incentive to produce the full-employment output level.
when input prices and output prices are fixed, output levels adjust to ensure profit always equals zero.
that the total amount of output supplied in the economy depends directly on the volume of spending that results at a constant price level.
none of the above.

Answer 1

The correct answer is:

when both input prices and output prices are flexible, profit levels always adjust to give firms exactly the right profit incentive to produce the full-employment output level.

In the long run, the economy operates at full employment where the quantity of goods and services produced is not influenced by the price level. This is because, in the long run, all prices (including input prices) are flexible, allowing the economy to adjust to changes in demand. As a result, firms will produce at a level where they can cover their costs, including a normal profit, leading to a vertical long-run aggregate supply (LRAS) curve.