If the economy represented by the above graph is able to achieve full employment

Question

If the economy represented by the above graph is able to achieve full employment, real GDP will be equal to In short-run equilibrium, real GDP will be equal to and the price level will be This economy's short-run equilibrium implies the existence of a/an gap. If the economy is initially in short-run equilibrium when economic events cause aggregate demand (AD) to increase, the price level will increase to and real GDP will increase to If the economy is initially in short-run equilibrium when falling wage rates cause the short-run aggregate supply (SRAS) curve to shift to the right, the price level will decrease to 0.9 and real GDP will increase to If real GDP is equal to $1, 500 billion, the unemployment rate is than the natural rate of unemployment, so there is a in the labor market, implying that the wage rate is the equilibrium wage rate.

Explanation / Answer

If the economy is able to achieve full employment, real GDP is will be equal to _1800____. In the short run GDP is 1500. and the price level is 1. This is because at this equilibium, SRAS and AD curve intersect.

The real output is the short run is less than the potential output. It means that the economy is experiencing a deflationary gap. If AD increases, the economy will reach it long run output 1500 units and price level of 1.1

When SRAS curve shifts to the rights, price level falls to 0.9 and output is 1800 units.

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