Question

1. Use the table below to answer the following questions

Price level	Real GDP supplied (short run)	Real GDP demanded
100	550	600
110	575	575
120	600	550
130	625	525

1. Calculate short-run equilibrium and the price level
2. If potential GDP equals 625, what is the gap called and what is the amount of the gap?
3. If potential GDP equals 550, what is the gap called and what is the amount of the gap?

Use the table below to answer the following questions

Disposable Income (billions)	Consumption (billions)	Savings (billions)
100		-20
200	200
300		20
400	360
500	440
600		80
700		100

1. Complete the table
   1. Graph the consumption schedule and determine the MPC and the MPS
   2. Determine the multiplier
   3. Assume that consumption increases by 3 billion, use the multiplier to determine the increase in real GDP

Answer 1

A) in short run eqm

Real GDP supplied = real GDP demanded

= 575

So P*= 110

Y*= 575

B) potential GDP = 625

As current GDP is lower than potential level

So it is Recessionary Gap

Gap amount = 625-575

= 50

C) current GDP Y = 575, is more than potential level

So it is inflationary gap

Gap size = 575-550

= 25

D) table

Yd	C	S
100	120	-20
200	200	0
300	280	20
400	360	40
500	440	60
600	520	80
700	600	100

Yd = C+S

A)

MPC = ∆C/∆Y

= 80/100

= .8

MPS = .2

B) multilplier m, = 1/(1-MPC)

= 1/.2

= 5

C) ∆C = 3,

m =∆Y/∆C

∆Y = 3*5= 15 billion