The table gives the aggregate demand and aggregate supply schedules for a nation.
-The table above gives data for the nation of Pearl, a small island in the South Pacific. If aggregate demand increases so that the quantity of real GDP demanded is $6 billion more at each price level, the new equilibrium real GDP is ________, and the nation is now experiencing a(n) ________.
A) $22 billion; recessionary gap
B) $28 billion; recessionary gap
C) $28 billion; inflationary gap
D) $25 billion; equilibrium
E) $22 billion; inflationary gap

Question

The table gives the aggregate demand and aggregate supply schedules for a nation.
-The table above gives data for the nation of Pearl, a small island in the South Pacific. If aggregate demand increases so that the quantity of real GDP demanded is $6 billion more at each price level, the new equilibrium real GDP is ________, and the nation is now experiencing a(n) ________.
A) $22 billion; recessionary gap 
B) $28 billion; recessionary gap 
C) $28 billion; inflationary gap 
D) $25 billion; equilibrium 
E) $22 billion; inflationary gap

Quizplus · Accepted Answer

An increase in aggregate demand by $6 billion at each price level would shift the aggregate demand curve to the right, leading to a new equilibrium real GDP higher than the initial equilibrium. Given the initial equilibrium at $22 billion, an increase of $6 billion in demand would result in a new equilibrium of $28 billion. This situation, where the actual GDP exceeds the potential GDP, is known as an inflationary gap, indicating that the economy is overheating and prices are likely to rise.

The Table Gives the Aggregate Demand and Aggregate Supply Schedules