This chapter deals with long-run equilibrium analysis. We first introduce a classical AD-AS model to analyze how the total output is determined in equilibrium under classical assumptions. Next, to analyze frictional unemployment, we discuss a model of the natural rate of unemployment. Then we introduce a representative-firm model to analyze real factor prices and income distribution. Then we introduce a classical model of real interest rate and discuss how the model may be employed to explain economic phenomena and conduct virtual experiments. Next, we introduce the quantity theory of money. We provide a case study of China’s hyperinflation in the 1940s. Finally, we introduce open-economy models to analyze the long-run equilibrium of exchange rates.

The Chinese economy demonstrated significant vigor from the eleventh century to the nineteenth. This period of nine centuries achieved remarkable progress in implementing the imperial examination system, improving literacy, establishing private landownership, developing market institutions, adopting new crops and improved farming technology, strengthening the lineage order, and lifting ordinary people’s capacity to deal with risks. According to the optimistic view, this is also the period during which two economic revolutions, the Tang–Song and Ming–Qing transitions, took place, marked by continuous economic growth and improvement in living standards for the population.1 To other scholars, however, this long period of quantitative growth was largely achieved through population increase, preventing China from escaping the “Malthusian trap.” That is, while the total size of the Chinese economy may have grown due to the rising population, per capita living standards failed to rise above historical norms and might have even declined during the long period. This period’s achievement and impact were nothing comparable to that of the Industrial Revolution which started in eighteenth-century Britain.