Use the following to answer questions .
Exhibit: Long-run Equilibrium
-(Exhibit: Long-run Equilibrium) Based on the figure, we can conclude that
A) in the short run, the economy will always achieve full-employment equilibrium.
B) in the long run, given flexible wages and prices, the economy will achieve equilibrium at its potential output level.
C) flexible wages and prices are irrelevant since the LRAS curve is vertical.
D) in the long run, the aggregate demand curve determines the potential output level.

Question

Use the following to answer questions .
Exhibit: Long-run Equilibrium 
-(Exhibit: Long-run Equilibrium) Based on the figure, we can conclude that
A) in the short run, the economy will always achieve full-employment equilibrium. 
B) in the long run, given flexible wages and prices, the economy will achieve equilibrium at its potential output level. 
C) flexible wages and prices are irrelevant since the LRAS curve is vertical. 
D) in the long run, the aggregate demand curve determines the potential output level.

Quizplus · Accepted Answer

The exhibit shows a long-run equilibrium where the aggregate demand curve intersects the long-run aggregate supply curve at the potential output level. This indicates that, in the long run, given flexible wages and prices, the economy will achieve equilibrium at its potential output level. Option A is incorrect because achieving full-employment equilibrium is not guaranteed in the short run. Option C is incorrect as flexible wages and prices are relevant in the long run to achieve equilibrium. Option D is incorrect because the aggregate demand curve does not determine the potential output level in the long run; rather, it determines the price level at which output is produced.

Use the Following to Answer Questions