Question

Answer the following questions on the basis of the three sets of data for the country of North Vaudeville:

Price Level A	Real GDP A	Price level B	Real GDP B	Price Level C	Real GDP C
110	290	100	215	110	240
100	265	100	240	100	240
95	240	100	265	95	240
90	215	100	290	90	240

a. Which set of data illustrates aggregate supply in the immediate short-run in North Vaudeville?     


Which set of data illustrates aggregate supply in the short run in North Vaudeville?     

  
Which set of data illustrates aggregate supply in the long run in North Vaudeville?      

b. Assuming no change in hours of work, if real output per hour of work decreases by 20 percent, what will be the new levels of real GDP in the right column of A?     

Instructions: Round your answers to 2 decimal places.       

With a price level of 110, new output =  .     

With a price level of 100, new output =  .     

With a price level of 95, new output =  .     

With a price level of 90, new output =  .     

Does the new data reflect an increase in aggregate supply or does it indicate a decrease in aggregate supply?

Answer 1

a. Which set of data illustrates aggregate supply in the immediate short-run in North Vaudeville?

   The data in B. The price level does not have time to adjust in the immediate short - run. Only output can change.

b. Which set of data illustrates aggregate supply in the short run in North Vaudeville?     

The data in A. The price level only has time to partially adjust in the short - run. Both the price level and output can change.

c. Which set of data illustrates aggregate supply in the long run in North Vaudeville?

The data in C. The price level has time to completely adjust in the long - run. Only price will change.

d. Let the original real output per hour be 100, then new real output per hour would be (100-20)= 80.

The change is 80/100= 0.8

To find the new level of output at each price level multiply the original values by 1.1.

Price level 110: New output equals 232 (=0.8 x 290)

Price level 100: New output equals 220 (=0.8 x 265)

Price level 95: New output equals 192 (=0.8 x 240)

Price level 90: New output equals 172 (=0.8 x 215)

e. This is an decrease in aggregate supply because output has decreased at every price level.