Suppose the economy is initially in long-run equilibrium. Then suppose there is a drought that destroys much of the wheat crop. If policymakers allow the economy to adjust to long-run equilibrium on its own, according to the model of aggregate demand and aggregate supply, what happens to prices and output in the long run?
A) Output rises; prices are unchanged from the initial value.
B) Output and the price level are unchanged from their initial values.
C) Output falls; prices are unchanged from the initial value.
D) Prices fall; output is unchanged from its initial value.
E) Prices rise; output is unchanged from its initial value.

Question

Quizplus · Accepted Answer

In the long run, the economy self-adjusts back to its potential output level, and prices return to their initial values after temporary fluctuations.

Suppose the Economy Is Initially in Long-Run Equilibrium