Use the figure below to answer the following questions.

Figure 28.1.3
-Refer to Figure 28.1.3.Assume that the figure illustrates an economy initially in equilibrium at the intersection of the SAS0 curve and the AD0 curve.If the aggregate demand curve is expected to shift to AD1 but remains at AD0,the new equilibrium real GDP is ________ and the new equilibrium price level is ________.

Question

Use the figure below to answer the following questions.
  
Figure 28.1.3
-Refer to Figure 28.1.3.Assume that the figure illustrates an economy initially in equilibrium at the intersection of the SAS0 curve and the AD0 curve.If the aggregate demand curve is expected to shift to AD1 but remains at AD0,the new equilibrium real GDP is ________ and the new equilibrium price level is ________.

Quizplus · Accepted Answer

When the AD curve shifts from AD0 to AD1, there is a positive demand shock increasing the AD curve to the right. However, SAS0 is not able to adjust to this increase in demand and so there occurs an inflationary gap until the long run. In the short run the new equilibrium is given by the intersection of AD1 and SAS0, which yields a new real GDP of $380 billion at a price level of 125. Therefore, the correct choice is (E) $380 billion; 125.

Use the Figure Below to Answer the Following Questions