The table sets out an economy’s aggregate demand and aggregate supply schedules.
ID: 1160030 • Letter: T
Question
The table sets out an economy’s aggregate demand and aggregate supply schedules.
1) What is the macroeconomic equilibrium?
2)If potential GDP is $600 billion, what is the type of macroeconomic equilibrium or what kind of gap is the economy experiencing? Explain. (4 points)
Price level
(GDP
price index)
Real GDP
demanded
Real GDP
supplied
(billions of 2009 dollars)
90
900
600
100
850
700
110
800
800
120
750
900
130
700
1,000
Price level
(GDP
price index)
Real GDP
demanded
Real GDP
supplied
(billions of 2009 dollars)
90
900
600
100
850
700
110
800
800
120
750
900
130
700
1,000
Explanation / Answer
1). The equilibrium is where the real GDP demanded is equal to the real GDP supplied. At the price level of 110 the real GDP demanded is equal to the real GDP supplied and that is the equilibrium.
2). If the potential GDP is 600, there exists an inflationary gap. The inflationary gap occurs in the economy when the real GDP is greater than the potential GDP. Here the potential GDP is 600 and the real GDP is 800, so there should be an inflationary gap.
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