Based on Exhibit 14A-1,when the aggregate demand curve shifts to the position AD₂ and the economy is operating at point E₂,the economy's position of long-run equilibrium corresponds to point:
A) E₁.
B) E₂.
C) E₃.
D) E₁ or E₃.

Question

Quizplus · Accepted Answer

Point E₃ is the long-run equilibrium point where aggregate demand intersects with the long-run aggregate supply curve. At this point, the economy is producing at its potential output level and there is no tendency for either inflationary or recessionary pressure in the economy. Point E₁ represents a short-run equilibrium where the economy is producing below its potential output level, and point E₂ represents a temporary equilibrium where the economy is producing above its potential output level, leading to inflationary pressure. Therefore, option C is the correct choice as it corresponds to the long-run equilibrium point.

Based on Exhibit 14A-1,when the Aggregate Demand Curve Shifts to the Position