Which of the following would cause the change shown in the diagram?

Question

BlackTom AI · Accepted Answer

To determine what would cause the change depicted, we first consider what the diagram shows: a shift of the long-run aggregate supply (LRAS) curve to the right from LRAS1 to LRAS2, with the price level on the vertical axis and Real GDP on the horizontal axis. This indicates an increase in the economy’s potential output or productive capacity rather than a movement along the existing supply curve.

Option 1: an improvement in technology. An advancement in technology typically makes production more efficient, allowing more output with the same resources. This raises the economy's potential output and shifts the LRAS curve to the right, which matches the diagram’s depiction of LRAS moving from LRAS1 to LRAS2. Therefore, this option is consistent with the change shown.

Option 2: an unexpected decrease in the price of a key resource. A fall in the price of a key resource reduces production costs in the short run and could shift the short-run aggregate supply (SRAS) curve to the right. However, it does not directly increase the economy’s long-run capacity; the LRAS would remain unchanged in the long run. Since the diagram shows a shift of LRAS, this option does not explain the long-run capacity increase indicated.

Option 3: an increase in taxes. Higher taxes typically reduce disposable income or reduce firms’ profits, which tends to shrink incentives to invest and produce, shifting the aggregate supply left (or the LRAS left over the long run). This would move LRAS inward, not outward, contradicting the rightward shift shown.

Option 4: a decrease in the stock of capital. A smaller capital stock lowers productive capacity, shifting the LRAS curve to the left as well. This is the opposite of what the diagram shows, which displays a rightward shift.

In summary, the only option that aligns with a rightward shift of LRAS (an increase in potential output) is an improvement in technology, while the other choices would either leave LRAS unchanged or shift it in the opposite direction. The diagram’s implication is that the economy’s productive capacity has grown due to better technology or similar fundamental improvements.

Which of the following would cause the change shown in the diagram?Single choice

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