At long-run equilibrium, inflation _______ and output equals ______.
Question
At long-run equilibrium, inflation _______ and output equals ______.
Solution
In the long-run equilibrium, inflation stabilizes and output equals potential output.
Here's the step by step explanation:
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Long-run equilibrium in macroeconomics is the point where the quantity of aggregate demand equals the quantity of aggregate supply, resulting in stable prices and full employment.
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Inflation stabilizes: In the long run, the economy naturally adjusts to changes in aggregate demand. If aggregate demand increases, causing inflation, the economy will eventually adjust by increasing output and employment, which will bring inflation back down. Similarly, if aggregate demand decreases, causing deflation, the economy will adjust by decreasing output and employment, which will bring inflation back up. Therefore, in the long run, inflation stabilizes at a certain level.
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Output equals potential output: Potential output is the maximum amount of goods and services an economy can produce when it is fully employing its available resources. In the long run, the economy adjusts to changes in aggregate demand by changing its level of output and employment. Therefore, in the long run, actual output equals potential output.
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