(Use the attached graph) Assume that the economy initially is operating at price

Question

(Use the attached graph) Assume that the economy initially is operating at price level 120 and real output level is $870. This output level is the economy's potential (or full-employment) level of output. Next suppose that the price level rises from 120 to 130. By how much will real output increase in the short run? In the long-run? Instead, now assume that the price level dropped from 120 to 110. Assuming flexible product and resource prices, by how much will real output fall in the short run? In the long run? What is the long-run level of output at each of the three price levels shown?

Explanation / Answer

By how much will real output increase in the short run? 0 In the long-run? from 870 to 890 Instead, now assume that the price level dropped from 120 to 110. Assuming flexible product and resource prices, by how much will real output fall in the short run? 0 In the long run? 870 to 850 What is the long-run level of output at each of the three price levels shown? 870

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