📚 Learning Guide
Full Employment Equilibrium
medium

Arrange the following steps in the process of achieving Full Employment Equilibrium in an economy: A) Aggregate demand increases due to external factors, B) The economy's output reaches its potential level, C) Short-run aggregate supply adjusts to meet changing demand, D) Long-run aggregate supply is established at this new equilibrium.

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Choose the Best Answer

A

A → C → B → D

B

A → B → C → D

C

C → A → D → B

D

D → B → A → C

Understanding the Answer

Let's break down why this is correct

Answer

To achieve Full Employment Equilibrium in an economy, the process begins when aggregate demand increases due to external factors, such as increased consumer spending or government investment. This rise in demand leads to a higher demand for goods and services, prompting businesses to produce more. As they respond, short-run aggregate supply adjusts to meet this increased demand, allowing the economy to grow and output to rise. Eventually, when the economy’s output reaches its potential level, it stabilizes, and long-run aggregate supply is established at this new equilibrium. For example, if a new technology boosts consumer interest in products, businesses will ramp up production until the economy finds its balance at Full Employment.

Detailed Explanation

First, demand goes up due to outside factors. Other options are incorrect because This option suggests that output reaches its potential before supply adjusts; This option starts with supply adjusting before demand increases.

Key Concepts

Full Employment Equilibrium
Aggregate Demand and Supply
Economic Stability
Topic

Full Employment Equilibrium

Difficulty

medium level question

Cognitive Level

understand

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