Question

A. Aggregate Demand, Aggregate Supply, and Equilibrium For a hypothetical economy, the aggregate-demand (AD), short-run aggregate...

A. Aggregate Demand, Aggregate Supply, and Equilibrium

For a hypothetical economy, the aggregate-demand (AD), short-run aggregate supply (AS), and long-run aggregate-supply (ASLR) schedules are as follows. The schedules show the GDP price deflator (P) versus real GDP (Q), with Q measured in billions of constant dollars.

P

AD

AS

ASLR

80

30

22

30

90

28

24

30

100

26

26

30

110

24

28

30

120

22

30

30

130

20

32

30

A1. GRAPHS: Graph the AD, AS, and ASLR curves on the same diagram. Label the curves and the axes. Indicate potential output (Qf) on the Q axis.

A2. SHORT-RUN AND LONG-RUN AGGREGATE SUPPLY: Explain the difference in shape between the AS and ASLR curves. [Answer the question in general, not just for this economy.

A3. SHORT-RUN AND LONG-RUN EQUILIBRIUM: State the conditions for short-run equilibrium and for long-run equilibrium. Which one implies the other? [Again, answer the question in general, not just for this economy.]

A4. SHORT-RUN EQUILIBRUM, THIS ECONOMY: What is the short-run equilibrium price level (P)? Explain your answer. What is the short-run equilibrium Q? Explain your answer. Show this short-run equilibrium price and output on the graph. Suppose that P is initially at 120. This implies that there is either excess demand or excess supply of Q—which one? And what is the amount of this excess demand or excess supply? Then explain the process of eliminating the excess demand or supply, that is, the process to reach short-run equilibrium.

A5. LONG-RUN EQUILIBRIUM, THIS ECONOMY: What is long-run equilibrium GDP (Q)? Explain your answer. Assuming that the AD curve does not shift, what is the long-run equilibrium price level (P)? Explain your answer. Show the long-run equilibrium price and output on the graph. Beginning at short‑run equilibrium, describe the process to long-run equilibrium.

B. Theorems--True or False?

(total 5 points--2.5 points for each of B1, B2)

For each proposition, considered independently: (a) State whether True or False. (b) Then explain your answer. Define the important terms in your explanation. You may use graphs in your answers.

B1. A country's potential output can increase while its actual output decreases.

B2. China will likely surpass the United States in per-capita GDP before it surpasses the United States in GDP itself.

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