-In the above figure, the short-run equilibrium will eventually adjust to a long-run equilibrium with a
A) lower price level and smaller real GDP.
B) higher price level and larger real GDP.
C) higher price level and smaller real GDP.
D) lower price level and larger real GDP.

Question

-In the above figure, the short-run equilibrium will eventually adjust to a long-run equilibrium with a
A) lower price level and smaller real GDP. 
B) higher price level and larger real GDP. 
C) higher price level and smaller real GDP. 
D) lower price level and larger real GDP.

Quizplus · Accepted Answer

In the short run, an economy can experience an equilibrium where output is above or below its long-run potential, leading to inflationary or deflationary gaps. Over time, adjustments in wages and input prices will move the economy back towards its long-run equilibrium, characterized by the potential level of output. If the short-run equilibrium is above the potential output, it will adjust to a long-run equilibrium with a higher price level (due to inflationary pressures) and a return to the smaller, sustainable level of real GDP, which is the economy's long-run potential output.

-In the Above Figure, the Short-Run Equilibrium Will Eventually Adjust