To determine the level of
Explanation of Solution
The short-run equilibrium takes place when the short-run
The aggregate demand curve and the short-run supply curve cannot be identified as they represent different concepts.
The short-run equilibrium is not necessarily occurring at potential output.
The short-run aggregate supply curve is upward-sloping and not vertical in shape.
The short-run equilibrium assumes rigidity of wages and not flexible wages.
Thus, option ‘b’ is the correct option.
The
The economy does not reach its potential output in the short run. It is a long-run phenomenon. Therefore, option (c) is incorrect.
In the short run, wages are sticky therefore, more labor can be supplied only when wage rises. Therefore, the short-run supply curve is upward slopping. Option (d) is incorrect.
Short-run equilibrium can occur when all prices, including wages, are fully flexible. But with sticky prices too short-run equilibrium can take place. Hence, option (e) is incorrect.
An economy is said to be in short-run equilibrium when the level of aggregate output demanded is equal to the level of aggregate output supplied. In the AD-AS model, the short-run equilibrium output can be found at the point where the Aggregate Demand (AD) intersects the Short-Run Aggregate Supply (SRAS).
Chapter 4R Solutions
Krugman's Economics For The Ap® Course
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