Sure, let's analyze the effects of a decrease in the long-run aggregate supply (LRAS) curve step-by-step:
1. Understanding LRAS:
- The LRAS curve represents the total amount of goods and services that an economy can produce when both labor and capital are fully employed. It is vertical because, in the long run, the economy's output is determined by factors such as technology, resources, and workforce, rather than price levels.
2. Effects of a Decrease in LRAS:
- When the LRAS curve shifts to the left, it implies that the economy's potential output has decreased. This situation could be due to factors such as a reduction in the labor force, a decrease in capital, or a decline in productivity.
3. Price Levels:
- With a decrease in the economy's potential output, the same amount of aggregate demand now intersects the LRAS curve at a higher price level. This is because fewer goods and services are available, driving prices up.
4. Real Output:
- Since the potential output (maximum sustainable output) of the economy has decreased, the real output in the long run will also decrease. This means that the economy is producing less than before.
Based on this analysis, we can conclude:
- A decrease in LRAS leads to an increase in the average price level.
- A decrease in LRAS also results in a decrease in real output.
Therefore, the correct answer is:
C. an increase in the average price level and a decrease in real output.
