Question

Review the problem shown in the Work It Out titled "Interpreting the AD/AS Model." Like the

information provided in that feature, Table 24.2 shows information on aggregate supply, aggregate demand, and the price level for the imaginary country of Xurbia.

Price Level       AD       AS

110                  700      600

120                  690      640

130                  680      680

140                  670      720

150                  660      740

160                  650      760

170                  640      770

Table 24.2 Price Level: AD/AS

a. Plot the AD/AS diagram from the data shown. Identify the equilibrium.

b. Imagine that, as a result of a government tax cut, aggregate demand becomes higher by 50 at

every price level. Identify the new equilibrium.

c. How will the new equilibrium alter output? How will it alter the price level? What do you

think will happen to employment?

Answer 1

a.

The equilibrium is at Q=680 and P=130

b.

The equilibrium is at Q=720 and P=140

c. The new equilibrium would increase by 40. It increases price level by 10. This would increase employment as firms would hire more labors to meet the increased demand