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MACROECONOMICS - aggregate demand & supply The aggregate demand and supply for C

ID: 1140647 • Letter: M

Question

MACROECONOMICS - aggregate demand & supply

The aggregate demand and supply for Cancum are shown in the table below. Potential GDP (LAS) is $700 billion.

Price Index

Aggregate Quantity Demanded

Aggregate Quantity Supplied

105

800

50

110

700

200

115

600

350

120

500

500

125

400

600

130

300

700

135

200

800

140

100

850

a. If the economy is in equilibrium, it experiencing a(n) inflationary/recessionary gap of $____________ ?

b. Suppose government uses countercyclical fiscal policy to close the gap. In order to achieve full employment AD would have to increase/decrease by $_____________.

c. As a result of this change, the inflation rate would be _________ %. Round your answer to 2 decimal places.

Please write your solution clearly & show your work.

Price Index

Aggregate Quantity Demanded

Aggregate Quantity Supplied

105

800

50

110

700

200

115

600

350

120

500

500

125

400

600

130

300

700

135

200

800

140

100

850

Explanation / Answer

A. LAS = $700,

And equilibrium exists wheee AD = AS = $500

Theeefore, there exists recessionary gap of $200.

B. In order to achieve full employment, AD would have to increase by $ 200 and come to level of $700

C. At this new equilibrium, price would be 110.

Inflation = ((120-110) / 120) * 100 = -8.33%