The long-run aggregate supply curve is vertical at $10 trillion, but the short-run aggregate supply curve intersects the aggregate demand curve at $12 trillion. From this, we know that
A)the economy is operating below full capacity in the short run, and will have to adjust by hiring more workers, thus reducing unemployment.
B)the price level is too high. The only way long-run equilibrium can be restored is to lower the price level.
C)adjustments will have to occur so that the long-run aggregate supply equals $12 trillion.
D)adjustments will have to occur so that the short-run aggregate supply intersects the aggregate demand curve at $10 trillion.

Question

Quizplus · Accepted Answer

In the long run, the economy will adjust to the full capacity level of output, which is $10 trillion. This means that the short-run equilibrium output of $12 trillion is above the long-run potential, and adjustments will occur to bring output back to $10 trillion.

The Long-Run Aggregate Supply Curve Is Vertical at $10 Trillion