Question

# 2. Based on the table below Price Level (2019 = 100) Quantity of Real GDP demanded...

2. Based on the table below

 Price Level (2019 = 100) Quantity of Real GDP demanded (trillion of 2019 dollars) Quantity of Real GDP supplied (trillion of 2019 dollars) 115 6.8 12.0 110 9.4 11.0 105 10.0 10.0 100 10.6 9.0 95 11.2 8.0 90 11.8 7.0

a. What is the equilibrium price level and real GDP?

b. If potential GDP is \$11 trillion, what does that imply about the economy's level of employment?

c. If potential GDP is \$9 trillion, what does that imply about the economy's level of employment? (3 points)

Ans.

a) The equilibrium level of GDP is where the real GDP supplied is equal to the real GDP demanded. So, equilibrium real GDP = \$10 trillion and corresponding price level is 105.

b) If the potential GDP is \$11 trillion, so, the economy might be facing stagflation or a recessionary gap. A stagflation is when the price level increases but output decreases, this us due to supply side shocks while a recessionary gap is due to demand side shock. So, in both the cases the unemployment will be more than the natural rate.

c) A potential GDP of \$9 trillion means that the economy is facing inflationary gap that is actual GDP is more than potential. This will require more number of labour units because of increased productivity. So, the unemployment rate will be less than the natural rate if unemployment.