Activity #5 ADAS (total 20 points) 1. (3 points) Real Output Demanded (in S bill

Question

Activity #5 ADAS (total 20 points) 1. (3 points) Real Output Demanded (in S billions) by Net Exports 10 12 14 16 18 Consumers +Investors +Government+ Aggregate Aggregate Level 120 110 100 90 80 70 Demand supply 320 260 80 92 104 116 128 140 15 16 17 18 19 20 20 20 20 20 20 170 135 100 80 60 154 21 20 (a) What is the level of equilibrium GDP? (8) (b) What is the equilibrium price level? (c) If full employment occurs at real GDP- $200 billion, what kind of GDP gap exists? (d) How large is that gap? (e) Which macro problem exists here (unemployment or inflation)? 2 (2 points) Why do rich people have a higher marginal propensity to save than poor people? 3. (3 points) 3. When unwanted inventories pile up in retail stores, how is production affected? 4. (4 Points) If the marginal propensity to consume is 0.8, What are the steps in this process? (a) What is the value of the multiplier? (b) What is the marginal propensity to save?

Explanation / Answer

(1) Filled-in table as follows.

(a) In equilibrium, AD = AS, therefore

Equilibrium GDP = $170 billion

(b) When AD = AS = $170 billion, Price level = 90

(c) Since full employment GDP is higher than equilibrium GDP, there is a recessionary gap.

(d)  Recessionary gap ($ Billion) = 200 - 170 = 30

(e) Since there is a recessionary gap, actual unemployment rate is higher than natural rate of unemployment. So the problem of unemployment exists in this case.

NOTE: As per Chegg answering guideline, the 1st question is answered.

C I G NX AGGREGATE DEMAND AGGREGATE SUPPLY 80 15 20 10 125 320 92 16 20 12 140 260 114 17 20 14 165 210 116 18 20 16 170 170 128 19 20 18 185 135 140 20 20 20 200 100 154 21 20 22 217 80

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