Suppose that the aggregate demand and aggregate supply schedules for a hypotheti

Question

Suppose that the aggregate demand and aggregate supply schedules for a hypothetical economy are as shown below: Amount of Real GDP Demanded, Price Level (Price Amount of Real Billions $100 200 300 400 500 Index) 300 250 200 150 100 GDP Supplied, Billions $450 400 300 200 100 a. Use the data above to graph the aggregate demand and aggregate supply curves Instructions (1) Use the tools provided 'AD' and 'AS' to draw the aggregate demand (plot 5 points total) and aggregate supply curves (plot 5 points total) given in the table above. To earn full credit for this graph, you must plot all required points for each curve (2) Use the drop line tool 'Eq' to indicate the equilibrium price level and the equilibrium level of real output. AD 350 AS 300 Eq 250 200 150 0 100 50 100 200 300 400 500 600 700 Real domestic output (billions of dollars) reset

Explanation / Answer

A) Equilibrium is a point of no force or no incentive to change. Thus equilibrium price is a price where quantity demand=quantity supplied. Thus equilibrium price=200 and equilibrium real output=300. It is not necesaary to have always equilibrium output equal to full employment equilibrium output.

B)At price=150, qty demanded=400, qty supplied=200. Thus there is excess demand=200

At price=250, there is excess supply=200

C) Equilibrium price will increase to 250 and new equilibrium output=400

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