Which of the following are true of an economy in its long-run equilibrium?

Question

Multiple select question.

There may be a positive or negative GDP gap.

The unemployment rate is below the natural rate.

It achieves its potential output.

Aggregate demand intersects both short-run and long-run aggregate supply at the same point.

Answer 1

In long-run equilibrium, the characteristics of an economy include:

1. It achieves its potential output. - True. Long-run equilibrium occurs when the economy is producing at its full potential output, which is where the aggregate supply equals aggregate demand.

2. Aggregate demand intersects both short-run and long-run aggregate supply at the same point. - True. In long-run equilibrium, the aggregate demand curve intersects both the short-run aggregate supply curve and the long-run aggregate supply curve at the same output level.

Regarding the other options:

3. There may be a positive or negative GDP gap. - False. In long-run equilibrium, the GDP gap is zero, meaning actual output equals potential output.

4. The unemployment rate is below the natural rate. - False. In long-run equilibrium, the unemployment rate is equal to the natural rate of unemployment, not below it.

Therefore, the true statements in long-run equilibrium are:

• It achieves its potential output.
• Aggregate demand intersects both short-run and long-run aggregate supply at the same point.