At long-run equilibrium, inflation _______ and output equals ______.Group of answer choicesequals the value determined by past expectations and pricing decisions; potential output.equals the value determined by past expectations and pricing decisions; the level of short-run equilibrium output consistent with that inflation rateis stable; potential output.equals the value consistent with potential output; the level of output consistent with zero inflation
Question
At long-run equilibrium, inflation _______ and output equals ______.Group of answer choicesequals the value determined by past expectations and pricing decisions; potential output.equals the value determined by past expectations and pricing decisions; the level of short-run equilibrium output consistent with that inflation rateis stable; potential output.equals the value consistent with potential output; the level of output consistent with zero inflation
Solution
At long-run equilibrium, inflation is stable and output equals potential output.
Here's why:
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In the long run, all factors of production and costs are variable, and the price level is flexible. This means that the economy can adjust to changes in demand or supply, leading to a stable inflation rate.
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Potential output refers to the highest level of economic output that can be sustained over the long term. It's the level of output at which the economy is operating at full employment, and where inflation is stable.
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Therefore, in the long-run equilibrium, the economy will adjust to changes in demand or supply, leading to a stable inflation rate and output equal to the potential output.
Similar Questions
At long-run equilibrium, inflation _______ and output equals ______.
To achieve long-run equilibrium in an economy with a recessionary gap, output will ______ and the inflation rate will _____.
Starting from a long-run equilibrium, a reduction in potential output leads to _____ gap in the short run and to ___ rates of inflation in the long run.Group of answer choicesan expansionary; lowerno output; higheran expansionary; highera recessionary; higher
If policymakers attempt to offset an adverse inflation shock with monetary _____, the resulting long-run equilibrium will be at _____ inflation rate compared with allowing the self-correcting mechanism to return the economy to potential output.Group of answer choiceseasing; a lowertightening; a highertightening; a lowereasing; a higher
QuestionIf an economy is in long-run equilibrium, which of the following combinations of policy actions will necessarily result in inflation in the short run?ResponsesDecreasing administered interest rates and increasing government spendingDecreasing administered interest rates and increasing government spendingIncreasing the discount rate and decreasing income taxesIncreasing the discount rate and decreasing income taxesIncreasing the required reserve ratio and increasing the discount rateIncreasing the required reserve ratio and increasing the discount rateSelling government bonds on the open market and decreasing government spendingSelling government bonds on the open market and decreasing government spendingBuying government bonds on the open market and decreasing government spending
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