In the AD-AS model, which statement correctly describes the short-run and long-run equilibria?

• A. Short-run equilibrium is where AD intersects SRAS; unemployment can deviate from the natural rate; long-run equilibrium occurs when AD intersects LRAS at potential output.
• B. Short-run equilibrium occurs at the intersection of AD and LRAS; long-run equilibrium occurs at the intersection of AD and SRAS.
• C. Short-run equilibrium is defined by the intersection of AD and SRAS, and unemployment may be above or below the natural rate; long-run equilibrium occurs where AD intersects LRAS at potential output.
• D. Short-run equilibrium occurs only when prices are flexible; long-run equilibrium requires wage rigidity.

Answer: (C)

The short-run equilibrium in the AD-AS framework is where aggregate demand intersects the short-run aggregate supply curve. In this regime, prices are sticky and don’t fully adjust, so the economy can produce above or below potential output, which means unemployment can be below or above the natural rate. The long-run equilibrium, on the other hand, occurs where aggregate demand intersects the long-run aggregate supply curve, which is vertical at potential output. In the long run, prices and wages adjust, pulling output back to potential and unemployment back to the natural rate.

This is why the statement that captures the idea—short-run equilibrium from the AD and SRAS intersection with unemployment deviating from the natural rate, and long-run equilibrium from the AD and LRAS intersection at potential output—is the correct one. The other descriptions confuse which curves define the short-run versus long-run equilibria and, in the short run, misstate the role of price flexibility.