FIGURE 27-5 Refer to Figure 27-5.This economy begins in equilibrium with M_S⁰,M_D⁰ and real GDP equal to potential GDP (with AD⁰ and AS⁰).At this initial equilibrium,the money supply is ________,the interest rate is ________,the price level is ________,and real GDP is ________.

Question

Quizplus · Accepted Answer

At the initial equilibrium point, MS1U1B1 = MD1U1B0 (money supply equals money demand), implying MS1U1B1 = S1S1 (the supply of money is fixed), MS1U1B1 = S1D1 (the money demand curve is downward sloping). 
With a money supply of $500 billion, the interest rate is 4% (where the money demand curve intersects MS1U1B1). 
The price level is determined by the intersection of AD and AS at potential real GDP, which is 100. At this point, the price level is 100. 
Finally, real GDP is $800 billion, which is at potential GDP.