Question

1. Aggregate demand and aggregate supply schedules in Burgazistan are given as follows:

Price level	Real GDP demanded	Real GDP supplied in the short run
75	600	400
85	550	450
95	500	500
105	450	550
115	400	600
125	350	650
135	300	700

1. What is the short-run macroeconomic equilibrium GDP level? (5 pts)
2. What is the equilibrium price level?

Suppose that the initial equilibrium you found in “a” is at the long run aggregate supply curve and the economy receives a negative demand shock which decreases aggregate demand by 100 at each price level.

3. What is the new short-run macroeconomic equilibrium GDP level?
4. What is the output gap?
5. In the long-run the economy adjusts to the long-run equilibrium point. What is long-run equilibrium GDP level?

Answer 1

a) In short run equilibrium occurs when demand = supply which occurs at point E. At this point,quantity traded is 500 units.

b) At point E, price is 95.

If there is fall in aggregate demand by 100 at every point.

a) New short run equilibrium occurs when Supply = New Demand (D1). At this point, quantity traded is 450 units while price if 85.

b) Long run equilibrium is 550 while new short equilibrium occurs when 540 unit is produced. There will be output gap of 500 - 450 = 50 units.

c) In long run, equilibrium adjust to long run equilibrium point because government or central bank try to raise aggregte demand by adopting expansionary fiscal policy or expansionary monetary policy such that output gap vanish. Adopting such a policy will shift aggregate demand curve rightward which will take economy to its long run equilibrium point of E.