Question

Assume that the economy is initially at a short-run equilibrium where the AD intersects with the short-run AS (SRAS). My year is 2017 and country is Brazil.

To do this, you will first need an estimate for potential Real GDP (RGDP) and the inflation rate at the long-run equilibrium. Assume for simplicity that potential RGDP and long-run equilibrium inflation is equal to the average of the indicator from the last five years. These numbers for my year are: average GDP is 4.14 trillion and 2017's 4.03 trillion, inflation average is 7.14% while 2017 is 3.44%.

From this data I need to make a AD-AS diagram and determine where the Brazil economy is in the context of the diagram for that year.

Answer 1

The data figures related to GDP and inflation rate in the economy of Brazil depicts that current level of GDP in 2017 is below the average GDP of 2017 which is also the potential level of GDP of Brazil. The inflation rate in 2017 is also below the average inflation rate of the economy. This shows that economy is in the recessionary gap because actual GDP is below the full employment level of GDp and inflation rate is low. This means that aggregate demand in the economy is below the level of aggregate demand required at full employment level. This situation of the economy can be depicted as: