Which of the following best explains what causes the economy to move from its short-run equilibrium to its long-run equilibrium?

• A. Changes in government spending
• B. Fluctuations in consumer preferences
• C. Variations in the money supply
• D. Adjustments in wages and prices in response to output gaps

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the difference between short-run and long-run equilibrium in macroeconomics. In the short run, prices and wages are sticky, meaning they do not adjust immediately to changes in economic conditions, which can cause output to deviate from its natural level.
2. Step 2: Recognize that short-run equilibrium occurs when aggregate demand equals short-run aggregate supply, but this may not correspond to the economy's potential output or natural level of output.
3. Step 3: Identify that the movement from short-run to long-run equilibrium involves adjustments in wages and prices. When there is an output gap (either a recessionary gap or an inflationary gap), wages and prices gradually adjust to restore the economy to its natural level of output.
4. Step 4: Understand that changes in government spending, consumer preferences, or money supply can shift aggregate demand or supply, but the key mechanism that moves the economy from short-run to long-run equilibrium is the adjustment of wages and prices in response to these output gaps.
5. Step 5: Summarize that the economy moves from short-run to long-run equilibrium primarily through the self-correcting mechanism of wage and price adjustments, which eliminate output gaps and bring the economy back to its natural level of output.