Question

Assume the economy of a country is currently operating at short-run equilibrium and producing $500 million in real GDP at a price level of $50. However, the full employment rate of output in Johnsrudia is $300 million. Draw a correctly labeled graph of the AD-AS model that reflects this information. After that tell what happen?

Answer 1

If the full employment rate of output in Johnsrudia is $300 million, then there is overproduction, and the inflationary gap occurs. In the AD-AS model AD and SRAS intersect to the right from the LRAS.