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Classical Approach to Reaching Long-Run Equilibrium


Consider the accompanying diagram and fill in the blanks in the paragraph below.

Created for Copyright 2016. All rights reserved.

Suppose the economy is currently at Point B in the diagram. The classical process in which the economy would return to its long-run level of output is as follows: since

is/are flexible, it/they would

in the face of a shortage of labor causing the

to shift left. This process would occur until the economy reaches a new long-run equilibrium at

with a price level of