In the long run, under what circumstances would the economy produce at potential output?
A) if workers mistakenly believe that nominal wages equal real wages
B) if expectations are the same in the long run and in the short run
C) if wages and prices are sufficiently flexible
D) if the price level is high

Question

In the long run, under what circumstances would the economy produce at potential output?  
A) if workers mistakenly believe that nominal wages equal real wages 
B) if expectations are the same in the long run and in the short run 
C) if wages and prices are sufficiently flexible 
D) if the price level is high

Quizplus · Accepted Answer

The economy would produce at potential output in the long run if wages and prices are sufficiently flexible. This is because, in the long run, prices and wages are expected to adjust to changes in demand and supply, thereby ensuring that the economy operates at its potential output level. A, B, and D are all incorrect. Mistaken belief about nominal and real wages, different expectations in the short and long run, and a high price level do not guarantee that the economy would produce at potential output.

In the Long Run, Under What Circumstances Would the Economy