Question

Consider an economy with the following aggregate demand (AD) and aggregate supply (AS) schedules. These schedules reflect the fact that, prior to the period we’re examining, decision makers entered into contracts and made choices anticipating that the price level would be P105.

AD105 Price Level SRAS105

(trillion dollars) (trillion dollars)

5.1	95	3.5
4.9	100	3.8
4.7	105	4.2
4.5	110	4.5
4.3	115	4.8

The quantity of GDP that will be produced will be _____ trillion and the price level that will emerge during this period will be _____.

How will the unemployment rate during the current period compare with this economy’s natural rate of unemployment?

-Unemployment will be equal the natural rate.

-Unemployment will be below the natural rate.

-Unemployment will be above the natural rate.

What will tend to happen to resource prices in the future?

-Resource prices will rise, shifting SRAS to the right.

-Resource prices will fall, shifting SRAS to the right.

-Resource prices will rise, shifting LRAS to the right.

-Resource prices will rise, shifting SRAS to the left.

Will the rate of GDP produced during this period be sustainable into the future?

-Real GDP is not sustainable at $4.5 trillion; it will tend to fall.

-Real GDP is not sustainable at $4.5 trillion; it will tend to rise.

-Real GDP will remain at $4.5 trillion.

Answer 1

(1) Quantity of real GDP is $4.5 trillion and price level is 110 (corresponding to AD = SRAS).

(2) Since actual price level is higher than expected price level, this indicates inflationary gap, so Unemployment will be below the natural rate.

(3) In long run, Resource prices will rise, shifting SRAS to the left.

(4) In long run, price level will be further higher and Real GDP is not sustainable at $4.5 trillion; it will tend to fall..