Long-Run Aggregate Supply Curve Slopes

Steps:

• Recall LRAS shows potential output at full employment, independent of price level in standard models.
• Note standard vertical slope due to fixed factors like technology and resources.
• Consider alternative theories: horizontal in liquidity traps with zero output gap; upward in models with increasing returns or hysteresis.
• Identify downward slope as impossible, violating supply principles.

Why A is correct:

• Downward-sloping supply contradicts the law of supply, where higher prices encourage more output, not less.

Why the others are wrong:

• B: Horizontal LRAS fits Keynesian models with persistent unemployment and fixed potential output.
• C: Upward-sloping LRAS occurs in post-Keynesian views with endogenous capacity growth.
• D: Vertical LRAS is standard in classical models, reflecting full-employment output unaffected by prices.

Final answer: A