Which of the following is a consequence of an increase in long-run aggregate supply?

• A. A reduction in the productive capacity of the economy
• B. A rise in the general price level
• C. A decrease in employment
• D. Higher potential output and economic growth

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the concept of long-run aggregate supply (LRAS). LRAS represents the total output an economy can produce when using all resources efficiently, reflecting the economy's productive capacity at full employment.
2. Step 2: Recognize that an increase in LRAS means the economy's potential output has increased. This shift indicates that the economy can produce more goods and services than before, often due to improvements in technology, increases in capital stock, or growth in the labor force.
3. Step 3: Analyze the effects of an increase in LRAS on the economy. Since LRAS shifts rightward, it implies higher potential output and economic growth, without necessarily causing inflationary pressure in the long run.
4. Step 4: Contrast this with other options: a reduction in productive capacity would shift LRAS leftward, a rise in the general price level is typically associated with demand-pull inflation (shifts in aggregate demand), and a decrease in employment is not a direct consequence of increased LRAS.
5. Step 5: Conclude that the correct consequence of an increase in LRAS is higher potential output and economic growth, reflecting an improved ability of the economy to produce goods and services sustainably.