The following table provides Information on the relationship between output and

Question

The following table provides Information on the relationship between output and unemployment. Use the Information In the table to answer the questions that follow. The economy is currently in short-run equilibrium at the intersection of the two curves depicted on the following graph. Place the black point (X symbol) on the graph to Indicate the level of output and aggregate expenditure when the economy Is at the full-employment equilibrium. The current equilibrium is at the full-employment equilibrium, because

Explanation / Answer

In long run (full-employment) equilibrum, cyclical unemployment = 0.

This happens when output = $17.5 billion.

In the graph, short run equilibrium is at the point where AE curve intersects the 45 degree line, which occurs at output level of $20 billion.

So, current equilibrium is ABOVE full-employment equilibrium, because Excessive (consumption) spending causes production to exceed potential output ($17.5 billion).

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