The level of potential output and location of the long-run aggregate supply curve are determined by

Question

Multiple Choice
Federal Reserve policy.
the price level.
the intersection of aggregate demand and short-run aggregate supply.
the natural rate of unemployment.

Answer 1

The level of potential output and the location of the long-run aggregate supply curve are primarily determined by the natural rate of unemployment.

In the context of aggregate supply, the long-run aggregate supply (LRAS) curve is vertical at the level of potential output, which reflects the economy's output when it is at full employment, corresponding to the natural rate of unemployment. Therefore, the correct answer is:

the natural rate of unemployment.