What does a leftward shift in the long-run aggregate supply (LRAS) curve indicate in the context of macroeconomics?

• A. An increase in the general price level due to higher aggregate demand
• B. A decrease in the economy's potential output or productive capacity
• C. A temporary reduction in output caused by a recession
• D. An improvement in technology leading to higher productivity

Answer: (B)

Verified step by step guidance

1. Understand that the Long-Run Aggregate Supply (LRAS) curve represents the economy's potential output or productive capacity when all resources are fully employed.
2. Recognize that a leftward shift in the LRAS curve means the economy's potential output has decreased, indicating a reduction in the maximum sustainable level of real GDP.
3. Identify possible causes for this leftward shift, such as a decline in factors of production (like labor or capital), a decrease in technology or productivity, or negative supply shocks.
4. Distinguish this from movements along the aggregate demand curve or short-run aggregate supply curve, which relate to price level changes or temporary output fluctuations.
5. Conclude that a leftward shift in LRAS signals a decrease in the economy's productive capacity, not just a change in price level or temporary output changes.