Equilibrium GDP
A) is not affected by nominal wage adjustments
B) represents the level of output at which public welfare is maximized
C) in the long run is equal to the average of the short-run GDP equilibria
D) is influenced by long-run adjustments in the labor market
E) falls if aggregate demand increases

Question

Quizplus · Accepted Answer

In the long run, the labor market adjusts to reach equilibrium, which affects the level of Equilibrium GDP. As the labor market adjusts, the production capacity increases or decreases, which affects the equilibrium GDP level. Therefore, Option D is the correct answer. Option A is incorrect because nominal wage adjustments affect the equilibrium GDP. Option B is incorrect because public welfare is determined by other factors as well. Option C is incorrect because the long-run equilibrium GDP depends on the potential output of the economy, and it may not be the same as the average of short-run GDP equilibria. Option E is incorrect because the equilibrium GDP level increases with an increase in aggregate demand.