Question

This question explores equilibrium in the aggregate demand and aggregate supply model. You will use schedules for an aggregate demand line and an aggregate supply line to identify the equilibrium price level and real GDP in a macroeconomy.

Below, you are provided the schedules for an aggregate demand line and an aggregate supply line.

Price Level (Consumer Price Index)	Aggregate Demand Real GDP (billions of dollars)	Aggregate Supply Real GDP (billions of dollars)
80	$11	$ 8
90	$10	$10
100	$9	$12
110	$8	$14
120	$7	$16

Task 1: Identify the macroeconomic equilibrium price level in this economy.

Task 2: Identify the macroeconomic equilibrium level of real GDP in this economy.

Task 3: If the full employment level of real GDP is $9 billion, can you discern whether this economy is experiencing an inflationary gap or a recessionary gap?

Task 4: Suppose personal income taxes fall. Would you expect real GDP to rise above or fall below the value you identified in Task 2?

can anyone solve this problem correctly plz, not guessing.

Answer 1

1) The macroeconomic level of price equilibrium in the economy is 90. At this price, the aggregate demand and the aggregate output both are equal at 10 each.

2) The macroeconomic level of real GDP is $10. (At the point the aggregate demand is equal to aggregate supply.)

3) This economy is experiencing an inflationary gap as the current output is $1 billion above the equilibrium point there is more demand which the economy can supply at the potential level of $9 billion.

4) If the personal income tax falls the disposable income in the hand of people will increase and they will demand more and more goods. This will lead to an increase in the price level and the real GDP will fall below the level we identified in the task 2 which was $9 billion.

As the price increase, the real GDP will fall.