Question

When is equilibrium achieved in the short run?

A. When the downward-sloping aggregate demand curve intersects the vertical aggregate supply curve

B. When the full-employment level of output is reached

C. When the downward-sloping aggregate demand curve intersects the upward-sloping aggregate supply curve

D. When the GDP gap is neither negative nor positive

Answer 1

Equilibrium in the short run is achieved when the downward-sloping aggregate demand curve intersects with the upward-sloping aggregate supply curve (option A), which determines the real GDP and price level at equilibrium.

Step-by-step explanation:

In the Aggregate Demand/Aggregate Supply Model, short-run equilibrium is achieved when the downward-sloping aggregate demand curve intersects with the upward-sloping aggregate supply curve. This intersection determines the equilibrium level of real GDP and the equilibrium price level in the economy.



Particularly, in the context provided, the economy originally reaches equilibrium where the AD intersects with AS at potential GDP (Yp), indicating full employment. However, when the aggregate demand shifts leftward, the adjustment leads to a reduction in real GDP without a decrease in the price level, and equilibrium occurs at a lower level of real GDP (Y₁), leading to unemployment.