Long-run Equilibrium
Definition
Long-run equilibrium occurs when the aggregate demand is equal to the aggregate supply in an economy, resulting in stable prices and full employment over time.
Analogy
Imagine a seesaw where one side represents aggregate demand and the other side represents aggregate supply. In long-run equilibrium, both sides are perfectly balanced, just like how stable prices and full employment are achieved when aggregate demand equals aggregate supply.
Related terms
Short-run Equilibrium: A temporary state where there is an imbalance between aggregate demand and aggregate supply, leading to changes in prices or employment levels.
Potential Output: The maximum sustainable level of real GDP that can be produced by an economy.
Inflationary Gap: When actual output exceeds potential output, causing upward pressure on prices.
"Long-run Equilibrium" appears in:
Subjects (1)
Study guides (3)
Practice Questions (1)
- What is the long-run equilibrium point on the Phillips curve?
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