2. BLANK: real GDP/price level/both the real GDP and price level 3. BLANK: less

Question

2. BLANK: real GDP/price level/both the real GDP and price level

3. BLANK: less than/greater than

4. BLANK: fall/rise

5. BLANK: aggregate demand/short-run aggregate supply/long-run aggregate supply

6. BLANK:right left

7. BLANK: only the real GDP/only the price level/both the real GDP and price level

4. The response of the self-regulating economy The economy of Langoria is currently in a state of long-run equilibrium in which the economy is producing at its natural real GDP. The level of real GDP is currently 4 trillion dollars, and the price level is 140 Changes in a Self-Regulating Economy 180 T 170 AD 160 AD2 150 130 120 RAS 110 100 REAL GDP (Trillions of dollars)

Explanation / Answer

The aggregate demand has shifted to the left. This has created a recessionary gap. In the short run both the real GDP and the price level will be affected.

Recessionary gap increases the unemployment rate so that the unemployment rate is greater than the natural rate of unemployment. In such a condition wages are expected to fall. As wages change the short run aggregate supply curve shifts to the right. Until the GDP is now equal to the full employment level. In the long run only price level will be affected.

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