Question

# Price Level           Quantity of Real GDP Demanded              Quantity of Real GDP supplied        &n

Price Level           Quantity of Real GDP Demanded              Quantity of Real GDP supplied

(\$ trillion)                                                                      (\$ Trillion)

100                                                           7.8                                                                            4.8

120                                                           7.6                                                                            5.2

140                                                           7.4                                                                            5.6

160                                                           7.2                                                                            6.0

180                                                           7.0                                                                            6.2

200                                                           6.8                                                                            6.4

220                                                           6.6                                                                            6.6

240                                                           6.4                                                                            6.8

260                                                           6.2                                                                            7.0

280                                                           6.0                                                                            7.2

300                                                           5.8                                                                            7.4

Use the data in the table above to answer the following question. Assume the potential output level is \$7.2 trillion.

The Federal Reserve uses monetary policy to close the output gap that exists. What is the new price level that emerges after the Federal Reserve's policy is fully implemented and the gap is closed?

From the given table we can see the initial equilibrium is at a price level of 220. The potential GDP is \$ 7.2 trillion the quantity of real GDP supplied at a price level of 280 is \$ 7.2 trillion.

After closing the gap the new price level = 280.

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