If the economy is in long-run equilibrium:
A)Inflation should be increasing at its long-term trend rate
B)Current output should be greater than potential output
C)Current inflation should equal expected inflation
D)Current inflation should be less than expected inflation

Question

Quizplus · Accepted Answer

In long-run equilibrium, the economy should have a stable inflation rate that is equal to expected inflation. This means that prices should be adjusting smoothly and there should not be any significant deviations from the long-run trend rate of inflation. Option A is incorrect as increasing inflation would indicate that the economy is overheating and not in equilibrium. Option B is incorrect as in long-run equilibrium, current output should be equal to potential output. Option D is incorrect as current inflation should not be greater than expected inflation in an equilibrium situation.

If the Economy Is in Long-Run Equilibrium