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

Suppose that the government spending increase by $200 billion at every price level in the preceding problem.

1. What will be the equilibrium GDP?
2. Which macro problem exists now?

Answer 1

(a)

	Real Output Demanded (in $ billion)
Price level	Consumer	Investor	Government	Net exports	AD ($ billion)	AS )$ billion)
100	180	120	50	50	400	0
110	150	110	50	40	350	150
120	120	100	50	30	300	300
130	90	90	50	20	250	450
140	60	80	50	10	200	600

Note: AD =C + I + G + NX

Where, C is real output demanded by consumers.

I = real output demanded by investors.

G = real output demanded by government

NX = net export.

At equilibrium; AD = AS

Thus, equilibrium GDP is $300 billion and equilibrium price level is 120.

(b) Government spending increases by $200 billion at each price level. Now it will be $250 billion at each price level.

	Real Output Demanded (in $ billion)
Price level	Consumer	Investor	Government	Net exports	AD ($ billion)	AS )$ billion)
100	180	120	250	50	600	0
110	150	110	250	40	550	150
120	120	100	250	30	500	300
130	90	90	250	20	450	450
140	60	80	250	10	400	600

Due to increase in government spending, AD increases at each price level.

Thus, new eqilibrium GDP is $450 billion an equilibrium price level is 130.

This increase in government spending leads to increase in price level from 120 to 130.

Hence, this creates inflation in economy:

Macro economic problem is Inflation