The long- run aggregate supply curve is vertical at $12 trillion but the short- run aggregate supply curve intersects the aggregate demand curve at $13 trillion. We know that
A) the economy is producing below full employment in the short run, and will adjust by hiring more workers, thus decreasing unemployment.
B) adjustments will occur so that the long- run aggregate supply equals $13 trillion.
C) adjustments will occur so that the short- run aggregate supply eventually intersects the aggregate demand curve at $12 trillion.
D) the price level is too high. The long- run equilibrium will occur with a lower price level.

Question

Quizplus · Accepted Answer

The short-run aggregate supply curve intersects the aggregate demand curve at $13 trillion, indicating that the economy is producing above its long-run potential output. However, in the long-run, adjustments will occur such that the short-run aggregate supply eventually intersects the aggregate demand curve at $12 trillion, which is the long-run potential output. This means that the economy will eventually adjust to produce at its full employment level and the price level will stabilize. Therefore, the best choice is C.

The Long- Run Aggregate Supply Curve Is Vertical at $12