Figure 8-5 Panel (a) shows an economy's aggregate production function, Panel (b) shows the labor market and Panel (c) shows the economy's long-run aggregate supply curve.
-Refer to Figure 8-5. The labor market represented in Panel (b) is in long-run equilibrium

Question

Figure 8-5  Panel (a) shows an economy's aggregate production function, Panel (b) shows the labor market and Panel (c) shows the economy's long-run aggregate supply curve.
-Refer to Figure 8-5. The labor market represented in Panel (b) is in long-run equilibrium

Quizplus · Accepted Answer

Long-run equilibrium occurs when the labor market is operating at the natural level of employment, which is the level of employment that is consistent with the economy's long-run aggregate supply curve. Panel (b) shows that at the natural level of employment, the real wage rate is equal to the equilibrium wage rate (W
*) and the economy is producing at the level of potential output (Y
). This represents long-run equilibrium in the labor market.

Figure 8-5 Panel (A) Shows an Economy's Aggregate Production