In the long-run 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 long-run 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. The long-run aggregate supply curve is vertical, representing the potential output of the economy, while the aggregate demand curve and short-run aggregate supply curve can shift, causing changes in output and prices in the short run. However, in the long run, the economy adjusts to its potential output, and the price level becomes stable, regardless of the location of the aggregate demand curve. Therefore, the correct answer is D.

In the Long-Run Aggregate Demand-Aggregate Supply Model