Answer to Question #178209 in Macroeconomics for Olivia Sullivan

Question

1. Suppose the aggregate demand and short‐run aggregate supply for an economy whose potential output equals $2,700 are shown by the chart.

a) What is the short‐run equilibrium level of real GDP and the price level.

b) Characterize the current economic situation. Is there an inflationary or a recessionary gap? If so, how large is it?

2. An economy is characterized by the values in the table for aggregate demand and short‐run aggregate supply.  Its potential output is $1,500. 

a) State the equilibrium level of real GDP and the price level.

b) Characterize the current economic situation. Is there an inflationary or a recessionary gap? If so, how large is it?

Answer 1

$$SOLUTION$$

1] [A]

short run equilibrium level of real GDP is $\$2500$

the price level is $\$1.00$

[B]

Declining economic conditions hence:

there is reduced cash flows ,

fall in demand and increased supply.

Recessionary gap.

$\$2700-2500=\$200$ .

2][A]

short run equilibrium level of real GDP is $\$2000$

the price level is $\$0.75$

[B]

There is increased economic conditions characterized by:

Rise in demand .

increased government expenditure .

increased money supply.

low unemployment rate.

Inflationary gap.

$\$1500-2000=\$-500$