Answer to Question #236861 in Economics for Edward

Question

Price level (GDP deflator, 2005 = 100) Quantity of real GDP demanded (trillions of 2005 dollars) Quantity of real GDP supplied (trillions of 2005 dollars) 115 8.8 12.0 110 9.4 11.0 105 10.0 10.0 100 10.6 9.0 95 11.2 8.0 90 11.8 7.0 Based on the table above, a) What is the equilibrium price level and real GDP? (4 marks) b) If potential GDP is $11.0 trillion, what does that imply about the economy's level of employment? (8 marks) c) If potential GDP is $9.0 trillion, what does that imply about the economy's level of employment?

Answer 1

a) The equilibrium price level is 105 and real GDP is Qs = Qd = 10.0 trillions of 2005 dollars.

b) If potential GDP is $11.0 trillion, then the economy's level of employment is below the potential level, so there is a recessionary gap.

c) If potential GDP is $9.0 trillion, then the economy's level of employment is above the potential level, so there is an inflationary gap.