Refer to the table given below. Suppose that aggregate demand increases such tha

Question

Refer to the table given below. Suppose that aggregate demand increases such that the amount of real output demanded rises by $7 billion at each price level.

Real Output Demanded (Original)

Price
Level

Real Output
Supplied

$506

116

$513

508

108

512

510

100

510

512

92

507

514

84

502

By what percentage will the price level increase? __________ percent

Will this inflation be demand-pull inflation or will it be cost-push inflation? (Click to select)Demand-pull inflationCost-push inflation

If potential real GDP (that is, full-employment GDP) is $510 billion, what will be the size of the positive GDP gap after the change in aggregate demand? $ ____________ billion

If the government wants to use fiscal policy to counter the resulting inflation without changing tax rates, would it increase government spending or decrease it? (Click to select)DecreaseIncrease

Real Output Demanded (Original)

Price
Level

Real Output
Supplied

$506

116

$513

508

108

512

510

100

510

512

92

507

514

84

502

Explanation / Answer

Demand equals Supply in equilibrium.

So in the beginning, Demand = Supply = 510 and Price = 100

That's because at Price = 100, demand equals supply (the third number in each series).

Increase every output by $7, you get this new series:

Real Output Demanded (new): $513, $514, $517 $519, $521

now, supply equals demand at $513 (the first in the series), at Price = 108.

So now price increased to 108 (up from 100) and demand = supply = $513

This is demand-pull inflation as the price went up because demand went up. (we changed the demand curve here, not the supply curve)

the size of the gap will simply be $513 (new demand) - $510 = $3.

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.