Chapter 4R, Problem 12MCQ

To determine

To determine the level of aggregate output level in the short-run equilibrium.

Explanation of Solution

The short-run equilibrium takes place when the short-run aggregate supply curve intersects the aggregate demand curve. Hence, at this point, quantity demanded equals quantity supplied.

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 demand and supply curves are based on the laws of demand and supply respectively. As per these laws, a demand curve is downward-sloping and a supply curve is upward slopping. They cannot be identical. Hence, option (a) is incorrect.

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.

Economics Concept Introduction

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).