In long-run full-employment equilibrium, which of the following is true ?
A) The CPI equals AD equals the peak of the production function curve.
B) The horizontal LRAS curve equals the intersection of the demand and supply curves in the labor market.
C) The CPI equals the aggregate production function at the equilibrium wage rates.
D) The CPI equals AD equals SRAS equals LRAS.

Question

Quizplus · Accepted Answer

In long-run full-employment equilibrium, the economy operates at its potential output, which is determined by the production function. At this level of output, the aggregate demand (AD) equals the long-run aggregate supply (LRAS) curve, which represents the economy's productive capacity. In addition, the short-run aggregate supply (SRAS) curve also intersects with the LRAS and AD curves, indicating that prices and wages have adjusted to their long-run equilibrium levels. Therefore, in long-run full-employment equilibrium, the CPI equals AD equals SRAS equals LRAS. Choice A is incorrect because the CPI may not necessarily equal the peak of the production function curve in the long-run. Choice B is incorrect because the horizontal LRAS curve does not represent the intersection of demand and supply in the labor market, rather it represents the economy's maximum potential output level. Choice C is incorrect because the equilibrium wage rates determine the intersection of the labor demand and supply curves, but not the aggregate production function.

In Long-Run Full-Employment Equilibrium, Which of the Following Is True