13. Use this aggregate demand and short-run aggregate supply schedule for a hypo

Question

13. Use this aggregate demand and short-run aggregate supply schedule for a hypothetical economy to answer the following questions Real domestic output demanded (in billions) $3000 4000 5000 6000 7000 8000 Real domestic output supplied (in billions) $9000 8000 7000 6000 5000 4000 Price level 350 300 250 200 150 100 (a) What will be the equilibrium price level and quantity of real domestic output? (b) If long-run aggregate supply is $7000 billions, is there a recessionary or inflationary gap? (c) If the economy is self-correcting what are the consequences of the gap?

Explanation / Answer

(a) Equilibrium occurs at the point where Real domestic output demanded equals real domestic output supplied. So, the equilibrium price level in the economy is 200 and equilibrium quantity is 6000.

(b) Long- run aggregate supply = $7000 billions. This is greater than short run equilibrium level of domestic output. So, there exists a recessionary gap because actual output is less than potential ouput.

(c) In the long run, economy will self correct itself by increasing the short run supply so that in the long run aggregate demand, short run aggregate supply and long run aggregagate supply of ouput are equal and there will be a decrease in the price level.

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

---

---

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