Suppose the aggregate demand and short-run aggregate supply schedules for a hypothetical economy are as shown below:
(a) What will be the equilibrium price and real output level in this hypothetical economy? Is this level of real GDP also the full-employment level of output? Explain.(b) Why won't a price level of 100 be the equilibrium price level? Why won't a price level of 110 index be the equilibrium price level?
(c) Suppose aggregate demand increases by $120 billion at each price level.What will be the new equilibrium price and output levels?
(d) What factors might cause aggregate demand to increase?
(e) Suppose short-run aggregate supply increases by $120 billion at each price level.What will be the new equilibrium price and output levels?

Question

Suppose the aggregate demand and short-run aggregate supply schedules for a hypothetical economy are as shown below:
  (a) What will be the equilibrium price and real output level in this hypothetical economy? Is this level of real GDP also the full-employment level of output? Explain.(b) Why won't a price level of 100 be the equilibrium price level? Why won't a price level of 110 index be the equilibrium price level?
(c) Suppose aggregate demand increases by $120 billion at each price level.What will be the new equilibrium price and output levels?
(d) What factors might cause aggregate demand to increase?
(e) Suppose short-run aggregate supply increases by $120 billion at each price level.What will be the new equilibrium price and output levels?

Quizplus · Accepted Answer

The Answer is (a) The equilibrium real GDP is $180 billion and the equilibrium price level is 105.There is not enough information given to determine whether or not this is the full-employment level of real GDP.
(b) At a price level of 100, the aggregate demand would exceed short-run aggregate supply and prices would be bid up.At a price level of 110, aggregate supply would exceed aggregate demand and the resulting surpluses would cause prices to be bid downward toward the equilibrium level of 105.
(c) The new equilibrium price level is 110 and the new equilibrium real GDP is $120 billion.
(d) Aggregate demand would increase if any of the four basic determinants of aggregate demand-consumer spending, investment, government expenditures, and net export spending-increased.An increase in consumer wealth, increased expectations of future inflation, a decline in household indebtedness, or decreased personal taxes would increase the consumer spending component of aggregate demand.Investment spending would increase as a result of lower interest rates, increased expectations of improved profits in the future, a decline in business taxes, new and improved technology, or a decline in excess capacity.Government spending might increase for a variety of reasons.Net export spending would increase as a result of improved economic conditions abroad or a depreciation in the Canadian dollar.
(e) The new equilibrium price level is 100 and the new equilibrium real GDP is $240.

Suppose the Aggregate Demand and Short-Run Aggregate Supply Schedules for a Hypothetical