The classical dichotomy and monetary neutrality are represented graphically by

Posted By Admin @ September 03, 2022


The long-run aggregate supply curve a. is vertical. b. is a graphical representation of the classical dichotomy. c. indicates monetary neutrality in the long run. d. All of the above are correct.



The correct answer is option d.


The long-run aggregate supply curve is a vertical straight line. This is because, in the long run, the output level is not affected by price changes. Instead, output level changes with the changes in the state of technology and level of inputs. In the long run, when price level increase, the factor prices or price of inputs will increase as well. So there will be no change in output due to the change in the price level.  

The vertical long-run aggregate supply curve also reflects classical dichotomy that in the long run, when all the resources will be fully employed, an increase in the aggregate demand cause the price level to rise while supply remains constant.

It also indicates that monetary policy only affect the price level, the economic output remains constant.

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