(a)
Equilibrium is attained at equality of aggregate quantity demanded and aggregate quantity supplied.
The aggregate quantity demanded equals the aggregate quantity supplied at level of real GDP of 1,500.
The price index corresponding to real GDP of 1,500 is 100
Thus,
The value of equilibrium real GDP is $1,500 and the price level is 100
The potential GDP is $1,500. The equilibrium real GDP is equal to potential GDP.
Thus,
There is no gap. The gap is equal to $0.
(b)
The firms become more optimistic and aggregate demand increases by $200.
Following is the complete table -
(c)
Equilibrium is attained at equality of aggregate quantity demanded and aggregate quantity supplied.
The aggregate quantity demanded equals the aggregate quantity supplied at level of real GDP of 1,600.
The price index corresponding to real GDP of 1,600 is 101
Thus,
The new level of equilibrium real GDP is $1,600 and the price level is now 101.
(d)
The potential GDP is $1,500. The new level of equilibrium real GDP is $1,600.
When the equilibrium real GDP exceeds the potential GDP then inflationary gap exists in the economy.
So,
There is an inflationary gap. The gap is equal to $100.
Assume that the potential GDP of the economy of Arlon is $1,500, and that the aggregate...
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2.. If the economy is operating in the short run AS curve and aggregate demand falls, what is likely to happen to real GDP, Price level, Unemployment and why? Would you suggest the economy will face a recessionary gap or inflationary gap? Ans:
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