In the extended aggregate demand-aggregate supply model,
A) long-run equilibrium occurs wherever the aggregate demand curve intersects the short-run aggregate supply curve.
B) the long-run aggregate supply curve is horizontal.
C) the price level is the same regardless of the location of the aggregate demand curve.
D) long-run equilibrium occurs at the intersection of the aggregate demand curve, the short- run aggregate supply curve, and the long-run aggregate supply curve.

Question

Quizplus · Accepted Answer

In the extended aggregate demand-aggregate supply model, long-run equilibrium occurs at the intersection of the aggregate demand curve, the short-run aggregate supply curve, and the long-run aggregate supply curve. This is because in the long run, prices are flexible and can adjust to changes in supply and demand, allowing the economy to always reach its potential output level. The long-run aggregate supply curve is vertical, indicating that in the long run, the economy's output is determined by factors such as technology, capital stock, and labor force, rather than the price level. Hence, long-run equilibrium occurs at the point where all three curves intersect.

In the Extended Aggregate Demand-Aggregate Supply Model