The economy is in long-run equilibrium:
A) when the AD and AS curves intersect at potential output Y*.
B) when the AD and AS curves intersect, regardless of the level of output.
C) when the AD and AS curves become vertical.
D) only when the business cycle is eliminated.

Question

Quizplus · Accepted Answer

Long-run equilibrium occurs when the AD and AS curves intersect at potential output Y*, which is the level of output at which the economy can produce without causing inflation or deflation. It represents a stable state of the economy in the long run, as there are no pressures on prices or output to change. Choices B, C, and D are incorrect because they do not accurately describe long-run equilibrium. In choice B, the level of output at which the AD and AS curves intersect is not necessarily at potential output, which is required for long-run equilibrium. In choice C, vertical AS curves would suggest that the economy is rigid and cannot adjust to changes in demand or supply, which is not the case in a long-run equilibrium. Finally, in choice D, the elimination of the business cycle is not a necessary condition for long-run equilibrium, as it is a temporary phenomenon that can occur within the broader long-run equilibrium trend.

The Economy Is in Long-Run Equilibrium