Long-run aggregate supply shift from human capital investment

Steps:

• Government spending on education and training boosts workforce skills and productivity.
• This increases the economy's potential output, shifting long-run aggregate supply (LRAS) rightward.
• With aggregate demand (AD) unchanged, the new equilibrium features higher output.
• Price level falls as the vertical LRAS moves right in the AD-AS model.

Why C is correct:

• C depicts a rightward LRAS shift, raising long-run output and lowering price level, consistent with the classical dichotomy where supply-side improvements expand capacity without inflationary pressure.

Why the others are wrong:

• A shows rightward AD shift, increasing output and price level via demand-pull inflation.
• B illustrates leftward SRAS shift, raising price level and reducing short-run output from cost pressures.
• D indicates leftward LRAS shift, decreasing long-run output and raising price level from reduced capacity.

Final answer: C