Answer the following questions on the basis of the following three sets of data

Question

Answer the following questions on the basis of the following three sets of data for the country of North Vaudeville: LO30.4

a. Which set of data illustrates aggregate supply in the immediate short run in North Vaudeville? The short run? The long run?

b. Assuming no change in hours of work, if real output per hour of work increases by 10 percent, what will be the new levels of real GDP in the right column of A? Do the new data reflect an increase in aggregate supply or do they indicate a decrease in aggregate supply?

(A) (B) (C) Price Level Real GDP Price Level Real GDP Price Level Real GDP 110 275 100 200 110 225 100 250 100 225 100 225 95 225 100 250 ?95 225 ?90 200 100 275 ?90 225

Explanation / Answer

The first dataset represents aggregate supply curve in the immediate short run since the real GDP rises with the increase in prices in the short run period. During the short run, the selling firms will supply more due to an increase in the price level an no immediate rise in the input prices. In the long run period, an increase in the price level does not increase the real GDP since the increase in prices by seller firms is offset by a rise in input prices. This phenomenon is depicted in dataset 3. If the real output per hour increases by 10% with no change in the number of hours, it will result in a decrease in aggregate supply due to rise in input prices. The real GDP level in the right column of A will go down proportionately.

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