Question

Answer the following questions, which relate to the aggregate expenditures model: Instructions: Enter your answer as a whole number. a. Given the following: Ca = $130, 1g = $60, Xn=- $10, and G= $40, what is the economy's equilibrium GDP? Equilibrium GDP = D . b. If real GDP in an economy is currently $250, will the economy's real GDP rise, fall, or stay the same? (Click to select) c. Suppose that full-employment and full-capacity) output in an economy is $250. If Ca= $180, lg = $60, Xn= - $10, and G= $40, what will be the macroeconomic result? Click to select)

Answer 1

(a) At equilibrium level , Y = AE

AE= Ca + Ig + G + Xn

AE= 130 + 60 + 40 + (-10)

AE = $220.

Y = AE (at equilibrium)

Y = $220
The economy's equilibrium GDP is $220.

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(b) It is given that the real GDP of the economy is $250 and the current equilibrium level of GDP (or aggregate expenditure) is $220. This means there must be unplanned inventory and the firms respond to it by building inventory and reducing output.

Thus the economy's real GDP will fall.

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(c) AE = Ca + Ig + G + Xn

AE = 180 + 60 + 40 + (-10)

AE = $270.

It is given that the full employment output is $250 and the aggregate expenditure is $270. Since the AE is greater than the full employment level of output, there is an inflationary gap in the economy.