The full-employment and full-adjustment level of real Gross Domestic Product (GDP) in the economy is represented by
A) the LRAS curve.
B) the horizontal line at the price level.
C) the AD curve.
D) the distance between the LRAS curve and the AD curve.

Question

Quizplus · Accepted Answer

The LRAS (long-run aggregate supply) curve represents the full-employment level of real GDP in the economy, which is the level at which all available resources are being used efficiently and there is no cyclical unemployment. This is also the level at which there is full adjustment of prices and wages, as indicated by the LRAS curve being vertical at this level. The AD curve represents the level of aggregate demand in the economy, which may or may not coincide with the full-employment level of real GDP depending on various factors such as fiscal and monetary policy, expectations, and external shocks. The horizontal line at the price level represents the short-run equilibrium point, which can deviate from the full-employment level if there are market imperfections or nominal rigidities. The distance between the LRAS curve and the AD curve represents the output gap, which is the difference between actual real GDP and the full-employment level.

The Full-Employment and Full-Adjustment Level of Real Gross Domestic Product