Rightward Shift in Long-Run Aggregate Supply Increases Potential GDP

Steps:

• Assume standard AD/AS diagram where X is initial equilibrium and Y is higher real GDP at full employment.
• Identify policies affecting long-run aggregate supply (LRAS) versus aggregate demand (AD) or short-run AS (SRAS).
• LRAS shifts right with productivity-enhancing investments, raising potential output without inflation.
• Match options to curve shifts: only infrastructure spending boosts production capacity.

Why B is correct:

• Government spending on infrastructure raises productive capacity, shifting LRAS rightward per the long-run growth model, increasing equilibrium real GDP from X to Y.

Why the others are wrong:

• A: Appreciation reduces net exports, shifting AD left and lowering real GDP.
• C: Higher interest rates reduce investment, shifting AD left and lowering real GDP.
• D: Higher real wages raise production costs, shifting SRAS left and reducing real GDP.

Final answer: B