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Table 2-4 Govt Real GDP Consumption InvestmentPurchases Net Exports NX $100 100 100 100 $1,600 2,000 $2,000 2,500 3,000 3,500 $350 350 350 350 $250 250 250 250 efer to Table 2-4 above. What is the equilibrium real GDP, Y, in this economy? A) $2,500 B) $2,000. C) $3,500 D) $3,000

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The money value of all final goods and services produced in the domestic territory of a country during a year called GDP. The real GDP is the money value of all final goods and services produced in the domestic territory of a country after adjusted for price increase. The market value of GDP may increase due to price increase without actual increase in output. Hence the real GDP estimates the real value of output. In other words real GDP is the GDP at constant price. The GDP is in cquilibrium when the aggregate spending is cqual to the GDP In an cconomy aggregate spending consists of C++G+X-M (net export). When the value of total expenditure is equal to the value of goods and services produced domestically it is called equiibrium GDP The equilibrium GDP occurs when the output level or the total amount of goods and services produced is exactly equal to the total amount of goods and services purchased. In other words equilibrium GDP Y=C+I+G+X-M. In the given example Y 2500 and aggregate spending C-2,000I 350+ G 250 NX- -100 2500. Here Y-2500 and AE -2500, so the equilibrium GDP is 2500. The mismatch between the Real ĢDP and Aggregate expenditure cause inflation and deflation in an economy. If the AE >Y, the result would be inflation. On the opposite if AE< Y, the result would be deflation. The equilibrium GDP can be further explained with the help of a diagram.

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