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When the economy is at equilibrium, which of the following statements must be true?

1) Supply equals demand
2) There is no unemployment
3) Prices are stable
4) There is no inflation

User Stash
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Final answer:

At economic equilibrium, supply indeed equals demand, but unemployment can still exist at a natural rate, and prices may not be stable due to natural fluctuations in the market and ongoing inflation.

Step-by-step explanation:

When the economy is at equilibrium, the statement that supply equals demand must be true. However, the other statements are not necessarily true. For instance, there can still be unemployment as the number that reflects in equilibrium is the natural rate of unemployment rather than zero unemployment. Moreover, prices can fluctuate even when the economy is in equilibrium, and inflation can still occur at different levels, as the long-term Phillips curve suggests there is no permanent trade-off between inflation and unemployment.

Regarding the labor market in a supply-and-demand model, the market should move toward an equilibrium wage and quantity. Yet, unemployment can exist due to various factors, including frictions, structural changes, and wage rigidities.

In summary, an equilibrium economy recognizes the natural occurrences of unemployment and inflation, understanding that these aspects can be consistent with macroeconomic stability.

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