MACROECONOMICS - aggregate demand & supply The aggregate demand and supply for C
ID: 1140647 • Letter: M
Question
MACROECONOMICS - aggregate demand & supply
The aggregate demand and supply for Cancum are shown in the table below. Potential GDP (LAS) is $700 billion.
Price Index
Aggregate Quantity Demanded
Aggregate Quantity Supplied
105
800
50
110
700
200
115
600
350
120
500
500
125
400
600
130
300
700
135
200
800
140
100
850
a. If the economy is in equilibrium, it experiencing a(n) inflationary/recessionary gap of $____________ ?
b. Suppose government uses countercyclical fiscal policy to close the gap. In order to achieve full employment AD would have to increase/decrease by $_____________.
c. As a result of this change, the inflation rate would be _________ %. Round your answer to 2 decimal places.
Please write your solution clearly & show your work.
Price Index
Aggregate Quantity Demanded
Aggregate Quantity Supplied
105
800
50
110
700
200
115
600
350
120
500
500
125
400
600
130
300
700
135
200
800
140
100
850
Explanation / Answer
A. LAS = $700,
And equilibrium exists wheee AD = AS = $500
Theeefore, there exists recessionary gap of $200.
B. In order to achieve full employment, AD would have to increase by $ 200 and come to level of $700
C. At this new equilibrium, price would be 110.
Inflation = ((120-110) / 120) * 100 = -8.33%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.