Refer to the table below Real Output Demanded, Real Output Supplied, Billions 49

Question

Refer to the table below Real Output Demanded, Real Output Supplied, Billions 498 504 510 516 522 Price Level 114 107 100 93 86 Billions 515 512 510 507 500 Suppose that aggregate demand Increases such that the oamount of real output demanded rises by $17 bilion at each price level. Instructions: Enter your answers as a. By what percentage will the price level Increase? whole numbers. percent. Will this Inflatlon be demand-pull inflation or will it be cost-push Inflation?(Click to select) b. 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?s C the government wants to use scal policy to counter the resulting inflation without changing tax rates would it increase government spending or decrease ? Click to select billion.

Explanation / Answer

Initial price level = 100 (Where AD = AS)

New price level = 114

Percentage increase = (114 - 100)/100 x 100 = 14%

This is an example of demand pull inflation (AD increases and pushes up the price level)

GDP gap (positive) = New equilibrium GDP - Initial potential GDP = 515 - 510 = $5 bn

Government should decrease spending so as to push AD curve leftwards and reduce price level.

Real output demanded (bn) Price level Real output supplied (bn) 515 114 515 521 107 512 527 100 510 533 93 507 539 86 500

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