The economy is in long-run equilibrium when ________ and ________.
A) real GDP equals potential GDP; the unemployment rate equals zero
B) the output gap equals zero; the inflation rate equals the target inflation rate and the expected inflation rate
C) the output gap is at its maximum; the inflation rate equals the target inflation rate and the expected inflation rate
D) the unemployment rate equals the natural rate of unemployment; the inflation rate equals zero

Question

Quizplus · Accepted Answer

Long-run equilibrium occurs when the economy is producing at its potential level of output, meaning the output gap is zero, and the inflation rate is at the targeted rate and expected rate. Option B correctly states this. Option A is incorrect because even at long-run equilibrium, there will still be some natural rate of unemployment due to things like frictional or structural unemployment. Option C is also incorrect as the output gap at its maximum indicates a recessionary gap, not long-run equilibrium. Option D is incorrect as zero inflation is not the target or expected inflation rate for most economies.

The Economy Is in Long-Run Equilibrium When ________ and ________

The Economy Is in Long-Run Equilibrium When and