The long-run aggregate supply curve is vertical at $100 billion, but the short-run aggregate supply curve intersects the aggregate demand curve at $120 billion. From this, we know that
A) the economy is operating below full capacity in the short run, and will have to adjust by hiring more workers, thus reducing unemployment.
B) the price level is too high. The only way long-run equilibrium can be restored is to lower the price level.
C) adjustments will have to occur so that the long-run aggregate supply equals $120 billion.
D) adjustments will have to occur so that the short-run aggregate supply intersects the aggregate demand curve at $100 billion.

Question

Quizplus · Accepted Answer

The long-run aggregate supply curve being vertical at $100 billion indicates the full capacity output of the economy. If the short-run aggregate supply intersects the aggregate demand curve at $120 billion, it suggests the economy is temporarily producing above its full capacity. Adjustments will naturally occur to bring the economy back to its long-run equilibrium, where the short-run aggregate supply will intersect the aggregate demand curve at the full capacity output of $100 billion.

The Long-Run Aggregate Supply Curve Is Vertical at $100 Billion