Question

Question 1. The table below gives the level of GDP demanded and supplied at various price...

Question 1.
The table below gives the level of GDP demanded and supplied at various price levels for Applenation.

Price Level

Real GDP Demanded (in Billions)

Real GDP Supplied (in Billions)

20

100

20

35

75

40

50

55

55

85

25

85

110

15

105

135

10

120

  1. Using the information provided, plot and draw the Aggregate Demand and Aggregate Supply curves.  Insert your drawing below.   
  2. Identify and show the macroeconomic equilibrium on your drawing from part i.
  3. Assume potential GDP is at $63 Billion. Illustrate the potential GDP on your drawing from part i. Is there an inflationary or recessionary gap? Explain why.

Homework Answers

Answer #1

Macroeconomic equilibrium is where Real GDP Demanded is equal to Real GDP Supplied. This happens at price level 50 where Real GDP Demanded and Real GDP Supplied is equal to 55 billion.

There is recessionary gap.

Reason- Since Aggregate Demand curve and Short run Aggregate supply curve intersect to the left of long run Aggregate supply curve or potential GDP, there is recessionary gap. As the real GDP is less than potential GDP.

If employment is below natural rate of employment, lower level of employment produces lower level of output. This creates a gap between real gdp and potential gdp known as recessionary gap.

Green line is the potential gdp. $63-$55 is the recessionary gap.

If it helps, kindly upvote.

For doubts comment below.

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