Question

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.

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.

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