Question

1. Test Yourself Q1 The following table provides an aggregate demand and aggregate supply schedule for an economy. Use the information from the table to answer the questions that follow. Aggregate Quantity Demanded Billions of Dollars) 3,200 3,100 3,000 2,900 2,800 Price Level 90 95 100 105 110 Aggregate Quantity Supplied Billions of Dollars) 2,750 2,900 3,000 3,050 3,075 Which of the following describes the equilibrium output and the price level? $2,900 billion and 105 $3,075 billion and 110 $3,200 billion and 90 $3,000 billion and 100

Answer 1

Equilibrium occurs at a point where aggregate quantity demanded equals to aggregate quantity supplied. And corresponding price level is called equilibrium price level.

Here in this question, we can see that at price level 100, the aggregate quantity demanded (i.e., $3,000 billion) equals aggregate quantity supplied (i.e., $3,000 billion).

So, the following describes the equilibrium output and the price level is:

$3,000 billion and 100.

If full employment comes at $2,800 billion, there is an inflationary gap.

Price Level Aeeregate Supply 100 Aggregate Demand Real GDP (Y) 3000

The reason behind this is the equilibrium real GDP is $3,000 billion which is higher than full employment real GDP.