Final answer:
Long-term price and output stability in the market is achieved when AD equals SRAS and LRAS, indicating a balanced economy with full employment and stable prices. SRAS shifts to the right increase quantity and, depending on AD, may lower or maintain price levels, while leftward shifts decrease quantity and increase prices. Stagflation represents economic stagnation with inflation, and various factors can shift AD rightward or leftward. Therefore, the correct option is b.
Step-by-step explanation:
To achieve long-term price and output stability in the market, the correct answer is b. AD = SRAS = LRAS. This condition indicates that the aggregate demand (AD) equals both short-run aggregate supply (SRAS) and long-run aggregate supply (LRAS), suggesting the economy is in a state of equilibrium where resources are fully employed, and there is neither upward nor downward pressure on the price level.
An original equilibrium is identified as Eo, where the AD curve intersects the SRAS curve at a specific output and price level. In a growing economy, shifts to the right in both the SRAS and AD curves show increases in the equilibrium output and price levels over time, reflecting economic growth and manageable inflation levels. A SRAS shift to the right means a higher equilibrium quantity and potentially a lower or same price level if AD does not change proportionately. Conversely, a SRAS shift to the left would decrease the equilibrium quantity and increase price levels. Stagflation is a condition of slow economic growth coupled with high unemployment and rising prices. Factors that could cause AD to shift include changes in fiscal and monetary policy, changes in consumer confidence, variations in foreign exchange rates, and so on. These factors might shift AD to the right, indicating increased demand, or to the left, indicating decreased demand.