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 $15 billion at each price level.

Real Output Demanded (Original)

Price
Level

Real Output
Supplied

$500

112

$515

505

106

512

510

100

510

515

94

507

520

88

500

1. By what percentage will the price level increase?

2. 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? In Billions?

Real Output Demanded (Original)

Price
Level

Real Output
Supplied

$500

112

$515

505

106

512

510

100

510

515

94

507

520

88

500

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 row in the table)

Increase every output by $15, we get this new,

         Real Output Demanded (new): $515, $520, $525 $530, $535

now, supply equals demand at $515 (the first row in the table), at Price = 112

So, now price increased to 112 (up from 100) and demand = supply = $515

1)

Percentage by which price level increase = (112-100)/100 *100 = 12%

2)

the size of the gap will simply be $515 billion (new demand) - $510 billion = $5 billion

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