Question

Which of the following correctly matches the demand situation with its long-run price effect?

Options

• Both deficient demand and excess demand → decline in prices in the long run

• Both deficient demand and excess demand → rise in prices in the long run

• Deficient demand → decline in prices in the long run; Excess demand → rise in prices in the long run

• Deficient demand → rise in prices in the long run; Excess demand → decline in prices in the long run

Answer 1

Deficient demand arises when equilibrium output is less than full employment output, causing a decline in prices in the long run. Excess demand arises when equilibrium output is more than full employment output, causing a rise in prices in the long run.