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Chapter_10_Key_Question_Solutions

Chapter_10_Key_Question_Solutions - 10-4(Key Question...

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10-4 ( Key Question ) Suppose that aggregate demand and supply for a hypothetical economy are as shown: Amount of real domestic output demanded, billions Price level (price index) Amount of real domestic output supplied, billions \$100 200 300 400 500 300 250 200 150 100 \$450 400 300 200 100 a. Use these sets of data to graph the aggregate demand and aggregate supply curves. What is the equilibrium price level and the equilibrium level of real output in this hypothetical economy? Is the equilibrium real output also necessarily the full-capacity real output? Explain. b. Why will a price level of 150 not be an equilibrium price level in this economy? Why not 250? c. Suppose that buyers desire to purchase \$200 billion of extra real domestic output at each price level. Sketch in the new aggregate demand curve as AD 1 . What factors might cause this change in aggregate demand? What is the new equilibrium price level and level of real output? (a) See the graph. Equilibrium price level = 200. Equilibrium real output = \$300 billion. No, the full-capacity level of GDP is more likely at \$400 billion, where the AS curve starts to become steeper. (b) At a price level of 150, real GDP supplied is a maximum of \$200 billion, less than the real GDP demanded of \$400 billion. The shortage of real output will drive the price level up. At a price level of 250, real GDP supplied is \$400 billion, which is more than the real GDP demanded of \$200 billion.

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