The economy is in long-run equilibrium

Question

Quizplus · Accepted Answer

Long-run equilibrium occurs where the short-run aggregate supply (SP) curve intersects the long-run supply (LP) line, as this represents the point where the economy is producing at its potential output in the long run. Therefore, choice B is correct. Choice A is incorrect because the SP curve can shift due to changes in input prices or technology, and thus only the specific intersection with the LP line represents long-run equilibrium. Choice C is incorrect because the SP curve for zero expected inflation can still shift due to changes in other factors affecting production, such as technology, and thus only the specific intersection with the LP line represents long-run equilibrium. Choice D is incorrect because the SP curve for zero expected inflation is just one possible SP curve, and long-run equilibrium can occur at any point along the SP curve that intersects the LP line.

The Economy Is in Long-Run Equilibrium