Answer to Question #206728 in Macroeconomics for Lila

Question

In case of sticky (flexible) prices and wages, aggregate supply is vertical.

Answer 1

When the economy achieves its natural level of employment, it achieves its potential output. This means that higher price levels will require higher nominal wages and flexible nominal wages will achieve this in the long run.

In the long run, the economy can achieve its natural level of employment and potential output at any price level. This gives us a long run aggregate supply curve with only one level of output at any price level. This is represented by a vertical line at the economy's GDP or potential level of output. This is illustrated by the following graph:

LRAS is the long run aggregate supply curve.