Question 26

When the economy is in equilibrium, AD = AS

In economic terms, equilibrium occurs when aggregate demand (AD) equals aggregate supply (AS). This balance indicates that the overall economy is stable, with production levels meeting the consumption levels.

A) Output is max

While maximum output may be a desirable economic goal, it is not a defining characteristic of equilibrium. Equilibrium focuses on the balance between supply and demand rather than the quantity of output alone.

B) AD = AS

This option correctly defines economic equilibrium. When aggregate demand equals aggregate supply, the economy operates efficiently, and there are no inherent pressures for change in price levels or output.

C) Inflation = 0

Inflation does not need to be zero for an economy to be in equilibrium. Equilibrium can occur at various inflation rates, indicating that this statement does not accurately describe the condition of equilibrium.

D) Unemployment = 0

An economy can be in equilibrium even with a certain level of unemployment due to frictional and structural factors. Therefore, stating that unemployment must be zero is incorrect in the context of equilibrium.

Conclusion

The correct answer, B) AD = AS, is essential for understanding economic equilibrium, as it directly relates to the balance between total demand and total supply in the economy. The other options misinterpret essential concepts of equilibrium or set unrealistic conditions that do not reflect typical economic scenarios.