The long-run aggregate supply analysis assumes that:

• A. all prices, including wages, are fully flexible
• B. output is determined solely by the price level
• C. nominal wages are fixed in the long run
• D. the economy is always operating below full employment

Answer: (A)

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 both capital and labor are fully employed, and all prices, including wages, are flexible.
2. Step 2: Recall that in the long run, prices and wages adjust to changes in the economy, meaning nominal wages are not fixed but flexible, allowing the economy to return to its natural level of output.
3. Step 3: Recognize that output in the long run is determined by factors such as technology, resources, and institutions, and is independent of the price level. Therefore, output is not solely determined by the price level.
4. Step 4: Note that the economy in the long run is assumed to operate at full employment, meaning it is not always below full employment.
5. Step 5: Conclude that the key assumption in LRAS analysis is that all prices, including wages, are fully flexible, allowing the economy to adjust and produce at its natural level of output.