Question

Assume the aggregate demand curve is given by ? = 12 − 0.5? and the aggregate supply curve by ? = 4 + 2 (?−10).(

(a) Find the equlibrium level of output and inflation rate and plot your results in a graph.

(b) Is the short-run equilibrium you’ve found in (a) also a long-run equilibrium? Explain your reasoning.

Answer 1

AD . Y = 12 - 0.5r

AS. r = 4 + 2 ( Y - 10)

AS = 4 + 2Y - 20

AS = 2Y - 16

AS. Y = 8 + 0.5r

a) equilibrium level of output = AS=AD

12-0.5r = 8 + 0.5r

4 = r

Y = 12 - 0.5 *4

Y = 10

so equilibrium output is 10 and inflation rate is 4

b) short run equilibrium is same in long run equilibrium if the short run equilibrium is at potential level of GDP and economy is at full employment level . if the short run equilibrium is less than or greater than potential output , then the long run equilibrium is different from short run equilibrium.