An economy is in long-run equilibrium when aggregate supply unexpectedly decreases. Then real GDP (ceteris paribus)will be
A)above potential GDP.
B)below potential GDP.
C)equal to potential GDP.
D)either above, below, or equal to potential GDP depending on the position of the aggregate demand curve.
E)either above or equal to potential GDP depending on the position of the aggregate demand curve.

Question

Quizplus · Accepted Answer

In long-run equilibrium, the economy is producing at potential GDP. A decrease in aggregate supply means the economy can no longer produce its full potential output, resulting in a decrease in real GDP. Thus, real GDP will be below potential GDP.

An Economy Is in Long-Run Equilibrium When Aggregate Supply Unexpectedly