In the long run, an economy will produce its potential output if _____
A) workers mistakenly believe that nominal wages equal real wages.
B) the expectations of workers and firms are the same in the long run and the short run.
C) wages and prices are sufficiently flexible.
D) the price level is high.
E) the price level is low.

Question

Quizplus · Accepted Answer

In the long run, an economy will produce its potential output if wages and prices are sufficiently flexible. This means that adjustments in wages and price levels, among other things, are able to occur smoothly in response to changes in market conditions. This flexibility ensures that resources are allocated efficiently and that the economy is operating at its full potential. A and D are incorrect because the level of nominal wages or the price level alone do not determine potential output. B is incorrect because even if expectations are the same in the long run and the short run, the economy still needs flexible wages and prices to reach its potential output. E is incorrect because having a low price level alone does not ensure that the economy will reach its potential output.

In the Long Run, an Economy Will Produce Its Potential