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Q 3.5: Support your answers with an AD–AS graph. A: Can the economy be in a...

Q 3.5: Support your answers with an AD–AS graph.

A: Can the economy be in a short-run macroeconomic equilibrium without being in a long-run macroeconomic equilibrium?

B: Can the economy be in a long-run macroeconomic equilibrium without being in a short-run macroeconomic equilibrium?

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Answer #1

A) It is true that economy can be in a short run economic equilibrium without being in a long run equilibrium because in a short run demand equals supply. It creates inflationary (Potential output < current output) or recessionary (Potential output > current output) gap in the economy when economy is in short run but not in long run equilibrium.

B) It is not true that economy can be in a long run equilibrium without being in short run because long run equilibrium occurs where long run aggregate supply curve = short run aggregate supply curve = demand curve.

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