Question

3) Answer the following questions on the basis of the three sets of data for the country of North Vaudeville:

A		B		C
Price Level	Real GDP	Price Level	Real GDP	Price Level	Real GDP
110	275	100	200	110	225
100	250	100	225	100	225
95	225	100	250	95	225
90	200	100	275	90	225

a. Which set of data illustrates aggregate supply in the immediate short run in North Vaudeville? The short run? The long run?

b. Assuming no change in hours of work, if real output per hour of work increases by 10 percent, what will be the new levels of real GDP in the right column of A? Does the new data reflect an increase in aggregate supply, or does it indicate a decrease in aggregate supply?

Answer 1

a. The data in B ilustrates aggregate supply in the immediate short- run in North Vaudeville. In the short run, only output will change and price level can not be changed in the immediate short- run.

b. The new level of output at each price -

Original values multiply by 1.1

Price level at 110:

New output = 1.1 x 275 = 302.5

Price level at 100:

New output = 1.1 x 250 = 275

Price level at 95:

New output = 1.1 x 225 = 247.5

Price level at 90:

New output = 1.1 x 200 = 220

The new data reflects an increase in aggregate suply because there is an increase in output at every level.