Price level- Real GDP demanded- Real GDP supplied (GDP deflator)- (trillions of

Question

Price level- Real GDP demanded- Real GDP supplied

(GDP deflator)- (trillions of 2009 dollars) -(trillions of 2009 dollars)

80 10 2

90 9 4

100 8 6

110 7 7

120 6 8

130 4 9

The table gives the aggregate demand and aggregate supply schedules for a nation. If the price level is 90, then the price level will ________ because ______

.

A. rise; the aggregate quantity demanded is greater than the aggregate quantity supplied

B. fall; the aggregate quantity demanded is less than the aggregate quantity supplied

C. rise; the aggregate quantity demanded is less than the aggregate quantity supplied

D. fall; the aggregate quantity demanded is greater than the aggregate quantity supplied

E. either fall or rise; markets are unstable and macroeconomic equilibrium is difficult to predict

Explanation / Answer

If the price level is 90, then the price level will rise because the aggregate quantity demanded is less than the aggregate quantity supplied. [ Option C ]

Explanation:- When the price level increases from 80 to 90, the aggregate demand decreases from 10 to 9 and aggregate quantity supplied increases from 2 to 4. At the price level of 90, The aggregate demand is 9 which is very less than the aggregate quantity supplied of 4. Thus, with the increase in price-level, aggragate demand falls in the economy and aggregate supply increases in the economy and accordingly the aggregate quantity demanded is less than the aggregate quantity supplied with the rise in price-level.

Conclusion:- If the price level is 90, then the price level will rise because the aggregate quantity demanded is less than the aggregate quantity supplied. (Option c)

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