In macroeconomic theory, why is the long run aggregate supply (LRAS) curve drawn as vertical at the level of potential gross domestic product?

Introduction / Context:
Aggregate supply in macroeconomics describes the total quantity of goods and services that firms in an economy are willing to produce at different price levels. In the short run, the aggregate supply curve slopes upward, but in the long run, most textbooks draw the long run aggregate supply curve as vertical at the level of potential gross domestic product. This question asks you to understand the reason behind that vertical shape and connect it to real factors of production.

Given Data / Assumptions:
- We are discussing the long run aggregate supply curve in standard macroeconomic models.
- Potential gross domestic product represents full employment output determined by available labour, capital, natural resources, and technology.
- The overall price level may change, but in the long run wages and input prices are flexible.
- We assume competitive markets and full adjustment of expectations in the long run.

Concept / Approach:
In the long run, all prices, including wages and input costs, are flexible and adjust to changes in the overall price level. As a result, a higher price level does not increase the real profitability of producing more output because costs also rise proportionally. The economy's capacity to produce is therefore determined by real factors such as the size and skills of the labour force, the stock of capital, the state of technology, and institutional factors. Since potential output does not depend on the price level in the long run, the long run aggregate supply curve is drawn as vertical at that level of real gross domestic product.

Step by Step Solution:
Step 1: Recall that potential output or full employment output is based on real productive capacity, not on the price level. Step 2: Understand that in the long run, wages and input prices adjust, so any change in the general price level is matched by proportional changes in costs. Step 3: This means that firms have no incentive to change real output just because the price level is higher or lower; real output stays at potential GDP. Step 4: Option A states that long run potential output depends on real factors like labour, capital, and technology rather than on the overall price level, which explains the vertical LRAS. Step 5: Options B and C introduce incorrect or incomplete reasons, and option D incorrectly claims that all the statements are correct.

Verification / Alternative check:
Imagine an economy at full employment where all factories, machines, and workers are being used at sustainable levels. If the overall price level doubles but wages, rents, and interest rates also double over time, the real incentives to produce more output do not change. Firms still face the same real costs and real revenues per unit of output. Therefore, the amount of real GDP that the economy can produce on a sustained basis remains the same. Only if there is an increase in capital stock, a rise in labour supply, or technological improvement will potential output shift, which corresponds to a shift of the entire LRAS curve, not a movement along it.

Why Other Options Are Wrong:
Option B is wrong because even in the long run economies can experience various forms of inflation; the absence of cyclical inflation is not the reason for a vertical LRAS.
Option C is wrong because potential GDP is not necessarily low; it can be high or low depending on the country and time period, and this has nothing to do with the shape of the LRAS curve.
Option D is wrong because only option A correctly states that the independence of potential output from the price level is the key reason for LRAS being vertical.

Common Pitfalls:
Students sometimes confuse short run and long run aggregate supply curves and think both must slope upward. Another common mistake is to assume that a higher price level always leads to more output, ignoring the fact that input costs also change. It is also easy to forget that the long run concept is about a time horizon long enough for all contracts and expectations to adjust. Keeping the distinction between nominal variables like prices and wages and real variables like output and employment is crucial for understanding why LRAS is vertical at potential GDP.

Final Answer:
Because in the long run, potential output depends on real factors like labour, capital, and technology, not on the overall price level.