Graphically,the intersection of the aggregate demand (ADI)curve,the inflation adjustment (IA)line,and the long-run aggregate supply curves determines
A) the recessionary gap.
B) the expansionary gap.
C) the central bank's policy reaction function.
D) short-run equilibrium.
E) long-run equilibrium.

Question

Quizplus · Accepted Answer

The intersection of the AD curve, the IA line, and the long-run aggregate supply curve determines the long-run equilibrium. This is because in the long run, the economy will adjust to its potential output level with no pressure on prices. In this equilibrium, the level of output is at the potential output level, and the price level is stable. Thus, the correct answer is E, long-run equilibrium.

Graphically,the Intersection of the Aggregate Demand (ADI)curve,the Inflation Adjustment (IA)line,and