What occurs when the economy is at long-run equilibrium?

• A. Aggregate demand exceeds aggregate supply
• B. Aggregate demand equals aggregate supply
• C. Unemployment rates are extremely low
• D. Prices constantly rise without stabilization

Answer: (B)

When the economy is at long-run equilibrium, aggregate demand equals aggregate supply. This condition signifies that the quantity of goods and services demanded by consumers, businesses, and the government precisely matches the quantity of goods and services produced in the economy at a given overall price level. At this equilibrium point, the economy operates efficiently, with all resources, including labor, being used optimally.

In long-run equilibrium, unemployment is at a natural rate—meaning it reflects frictional and structural unemployment rather than cyclical unemployment caused by economic downturns. This does not imply that unemployment rates are extremely low or that inflation is rampant; rather, it indicates that labor markets are in balance. The price level tends to stabilize at this point, as any increases in aggregate demand would typically lead to higher prices rather than further production.

In summary, long-run equilibrium is characterized by the balance between aggregate supply and aggregate demand, ensuring efficient resource utilization and stable prices over time.