Question

Macroeconomics Business Cycle Questions

Problem 2015%) Year Actual Real GDP Potential GDP Price Level Unemployment 2017 KD 10.5 billion KD 10.2 billion 106 4% 2018 KD 9.5 billion KD 10.2 billion 98 18% 2019 KD 10.2 billion KD 10.2 billion 100 6% 1. Describe country's macroeconomic condition in these three years in terms of macroeconomic equilibrium and business cycle. Explain 2. Describe the monetary policy which was used to fix the economy from 2018 condition to 2019. Illustrate graphically.

Answer 1

1) Potential GDP is the level of output which an economy can produce using all its resources optimally while actual GDP can be more or less than potential GDP.

Year 2017: As actual GDP is more than potential GDP, there must be higher aggregate demand which cause price level to rise than base year. More output produuced reduce the level of output.

Year 2018: Actual GDP is less than potential GDP, aggregate demand must be falling which reduced price level. Falling aggregate demand raised unemployment to that level.

Year 2019: As actual GDP is equal to potential GDP, unemployment level is at its natural rate.

2) Expansionary monetary policy must have been adopted in 2018 which will raise cash holdings with people tehreby raising the willingness to pay for goods and raise aggregate demand in the economy from AD0 to AD1. It raise price level from 98 to 100 and raise real GDP from $9.5 billion to $10.2 billion.

CRAS SAS lool 98 AD AD, AD, GS 10.2 Puontity