The long-run aggregate supply curve is vertical at $16 trillion but the short-run aggregate supply curve intersects the aggregate demand curve at $17 trillion. We know that
A) the economy is producing below full employment in the short run, and will adjust by hiring more workers, thus decreasing unemployment.
B) the price level is too high. The long-run equilibrium will occur with a lower price level.
C) adjustments will occur so that the long-run aggregate supply equals $17 trillion.
D) adjustments will occur so that the short-run aggregate supply eventually intersects the aggregate demand curve at $16 trillion.

Question

Quizplus · Accepted Answer

The intersection of the short-run aggregate supply curve and the aggregate demand curve at $17 trillion indicates that the economy is producing above its potential output level in the short run, which may lead to inflationary pressures. In the long run, adjustments will occur such that the short-run aggregate supply curve shifts to the left, intersecting the aggregate demand curve at the potential output level of $16 trillion. Therefore, the long-run equilibrium will occur at the potential output level of $16 trillion, and the short-run aggregate supply curve will eventually adjust to this level.

The Long-Run Aggregate Supply Curve Is Vertical at $16 Trillion