Which of the following best describes the effect of a war fought on home soil on a country's long-run aggregate supply (LRAS)?

• A. LRAS will increase because government spending rises during wartime.
• B. LRAS remains unchanged since wars only affect short-run aggregate demand.
• C. LRAS is likely to decrease due to destruction of physical and human capital.
• D. LRAS increases as war encourages technological innovation.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand what Long-Run Aggregate Supply (LRAS) represents. LRAS reflects the total output an economy can produce when all resources (labor, capital, technology) are fully utilized, and it is determined by the economy's productive capacity.
2. Step 2: Analyze how a war fought on home soil might impact the components of productive capacity. Consider that war can lead to destruction of physical capital (factories, infrastructure) and human capital (loss of workforce, skills), which are key inputs in production.
3. Step 3: Recognize that while government spending may increase during wartime, this primarily affects aggregate demand in the short run, not the economy's long-run productive capacity.
4. Step 4: Evaluate the possibility of technological innovation during war. Although wars can sometimes accelerate innovation, the immediate effect of destruction and loss of resources tends to dominate, reducing productive capacity.
5. Step 5: Conclude that the destruction of physical and human capital due to war on home soil is likely to decrease LRAS, reflecting a reduction in the economy's long-run productive potential.