The intersection of an economy's aggregate demand and long-run aggregate supply curves:
A) determines its equilibrium real GDP in both the long run and the short run.
B) determines its equilibrium price level in both the long run and the short run.
C) occurs at the economy's potential output in long-run equilibrium.
D) occurs at high levels of cyclical unemployment.

Question

Quizplus · Accepted Answer

The intersection of the economy's aggregate demand and long-run aggregate supply curves occur at the economy's potential output in long-run equilibrium. This is because the long-run aggregate supply curve represents the economy's potential output, which is the level of output that can be produced when all resources are fully employed. Therefore, the intersection of the two curves represents the point at which the economy is producing at its potential output level, which is the sustainable level of output in the long run.

The Intersection of an Economy's Aggregate Demand and Long-Run Aggregate