In a standard aggregate supply and demand diagram, which line represents the long-run aggregate supply (LRAS) curve?

• A. A horizontal line at the equilibrium price level
• B. A vertical line at the level of potential output
• C. A downward-sloping line from left to right
• D. An upward-sloping line from left to right

Answer: (B)

Verified step by step guidance

1. Recall that the Long-Run Aggregate Supply (LRAS) curve represents the economy's potential output, which is the level of output when all resources are fully employed and prices are flexible.
2. Understand that in the long run, output is determined by factors such as technology, capital, labor, and natural resources, and is not affected by the price level.
3. Recognize that because output does not change with the price level in the long run, the LRAS curve is vertical at the potential output level.
4. Contrast this with the Short-Run Aggregate Supply (SRAS) curve, which is typically upward sloping because prices and wages are sticky in the short run, causing output to vary with the price level.
5. Therefore, in the aggregate supply and demand diagram, the LRAS curve is represented by a vertical line at the level of potential output.