Question

For the long-run supply curve why can price level increase or decrease while GDP stays the same?

Maybe because the employment rate is at the maximum amount because of the demand curve so supply or demand can adjust depending on the amoubt of workers there are? (Just my guess for the answer)

Answer 1

The long-run supply curve is a part of AS-AD model (aggregate supply-aggregate demand model). In this model, changes in both aggregate demand and aggregate supply affect the price level and the output level in the economy. Here we measure the prices on the vertical axis and output level on the horizontal axis.

The long-run aggregate supply curve represents the output level that the economy can produce using all its resources. This means it is the full-employment output level. Since the output produced shows the full capacity that the economy can produce, no change in aggregate demand or price level can further affect the level of the long-run aggregate supply curve.

Thus, the long-run aggregate supply curve is vertical (perfectly inelastic). This means that the output will remain the same (as it is the full capacity output) even if the price level increases or decreases. Therefore, in the long-run aggregate supply curve, GDP remains the same (full capacity) even if the prices change.