Question

How might macroeconomic equilibrium be affected by the following events. Describe in words or draw a well labeled diagram.

a) a stock market crash                                               

b) the election of a new president

c) severe food crop failures in Canada

d) a spike in oil prices

Complete the following table:

Real Output Demanded (in $ billions) by:
Price Level	Consumption	Investment	Government	Net Exports	Agg’t Demand	Agg’t Supply
140	90	50	50	6		300
130	100	70	50	10		270
120	110	80	50	10		250
110	150	108	50	12		230
100	170	110	50	14		200

a) What is the equilibrium level of GDP?

b) What is the equilibrium price level?

c) If full employment occurs at real GDP = $230 billion, what kind of GDP gap exists?

d) How large is that gap?

e) Which macro problem exists here?

Answer 1

a) The equilibrium level of GDP is achieved at the point where AD = AS = 250

b) The equilibrium price level = 120

c) Equilibrium GDP is more than potential GDP and thus it is an inflationary gap.

d) GDP GAP = Full employment GDP - Equilibrium GDP = 230 - 250 = -20

e) Problem of inflation occurs.