The economy enters the long-run once:
A) Nominal wages become equal to real wages
B) Real wages become equal to nominal wages
C) Sufficient time has elapsed for wage contracts to expire and nominal wages to adjust to output-price changes
D) Sufficient time has elapsed for real GDP to increase and unemployment to decrease as a consequence

Question

Quizplus · Accepted Answer

The long-run is a period of time where nominal wages are able to fully adjust to changes in output prices. This occurs when wage contracts expire and new contracts are negotiated at wage rates that reflect current market conditions. Only then will nominal wages be in line with real wages, allowing the economy to reach its potential output level with no excess supply or demand in the labor market. Options A and B are incorrect because they are essentially the same answer, and real wages do not determine when the economy enters the long-run. Option D is incorrect because while an increase in real GDP and a decrease in unemployment may be indicators of the economy being in the long-run, they do not define when the long-run has been reached.

The Economy Enters the Long-Run Once