2. Equilibrium The following table shows the real output demanded and supplied a

Question

2. Equilibrium The following table shows the real output demanded and supplied at various price levels in a hypothetical economy Real Output Demanded (Billions of dollars) 80 120 200 320 Price Level (Index number) 160 120 80 40 20 Real Output Supplied (Billions of dollars) (Billions of dollars) 340 320 280 200 80 On the following graph, use the blue points (circle symbols) to plot the aggregate demand (Initial AD) curve for the economy. Then use the orange points (square symbols) to plot the short-run aggregate supply (SRAS) curve for the economy. Note: Line segments will automaticallyect the points

Explanation / Answer

The equlbrium price level is $20 and the equilibrium level of real output is 200.

The change in government spending increase the equilibrium level of real output by 80 .The price level increase due to the multiplier effect.

Explanation-Formula of output multiplier= 1 / (1 - MPC (1-t))=5.

1-MPC(1-t)=1/5=.2,Or,MPC=.8

change in real GDP= [1/(1 – b)] * change in government expenditure.

=1/(1-.8)*16

=80

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