Question

Complete the following table:

Real Output Demanded (in $ billions) by:
Price Level	Consumers	Investors	Government	Net Exports	AD	AS
100	180	120	50	50		0
110	150	110	50	40		150
120	120	100	50	30		300
130	90	90	50	20		450
140	60	80	50	10		600

a) What is the equilibrium level of GDP?

b) What is the equilibrium price level

c)   If full employment occurs at real GDP = $200 billion, what kind of GDP gap exists, if any?

      d) How large is the gap, if there is one?

      e) Which macro problem exists here?

Answer 1

a) Equilibrium level of GDP is $300 billion.

Equilibrium level is decided where = consumption + investment + government purchase + net exports are equal to aggregate supply.

At aggregate supply of $300 billion aggregate expenditure ( 120 + 100 + 50 + 30) is also $300 billion.

b) At the equilibrium level of income price level is 120.

c) If full employment level of income is $200 then there is inflationary gap of $100 billion because rela GDP is $300 billion and potential GDP is $200 billion.

d) There is gap of $100 billion. (300 - 200).

e) There is a problem of higher prices because there is inflationary pressure in the economy because actual GDP is higher then the potential GDP.

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