Answer to Question #99348 in Macroeconomics for Cynthia

Question

Suppose an economy is in long-run equilibrium.
a. Use the model of aggregate demand and aggregate supply to illustrate the initial equilibrium (call it point A). Be sure to include both short-run and long-run aggregate supply. Is this economy producing potential output? Is unemployment above, below, or equal to the natural rate of unemployment?

Answer 1

a. In the long-run the economy produces potential output at the point where AD = LRAS. The unemployment in this case is equal to the natural rate of unemployment.