Question

Please answer the following:

Consider the graph below. Then, answer the questions that follow. Pnical level 3 Real National Income 1. What is the equilibrium price level, given the AS and AD curves? (1 pt) click to enter text 2. What is the equilibrium level of real national income? (1 pt) click to enter text

Answer 1

Answer 1. Equilibrium price level is where AD equals AS , which gives equilibrium price level as 1.0

Answer 2. Similarly , equilibrium real national income is 2

Answer 3. Either expansionary monetary policy or expansionary fiscal policy would cause AD curve to shift to AD1.

Answer 4. As the AD curve has shifted towards right , the aggrrgate demand has increased therefore with given level of aggregate supply , the equilibrium price level.has now increased. This is because , as the aggregate supply has been constant while aggregate demand has increased this means that there is excess demand in the economy which causes the price level in the economy to rise.

Answer 5. As now the aggregate demand has increased , aggreagte supply being same , there is excess demand which causes price level to rise , which in turn causes equilibrium real income to rise as there is an upward movement across aggregate supply curve as prices rise.

Answer 6. This is a short run effect because , aggregate supply in the long run is fixed at the full employment level. That is the aggregate supply in the long run is a vertical curve.