Question

Answer the following questions. Remember that you can only enter numbers in the boxes given and that decimal places are separated with a dot (not with a comma). Do not leave empty boxes, otherwise partial marks will not be given. Also, enter at least 4 decimals in your answers whenever possible.

Suppose you have the following AD and AS equations:

• ?=82−0.8?Y=82−0.8π (AD equation)
• ?=−7+1.8?Y=−7+1.8π (Short Run AS equation)
• ?=49.15Y=49.15 trillions (Long Run output)

a) The real GDP in equilibrium the short run is equal to Answer for coordinate ..... trillions.

b) The inflation rate in equilibrium in the short run is equal to .

c) The expected inflation in the long run is ... %.

Answer 1

b) The aggregate demand or AD equation is given as Y=82-0.8 and the short-run aggregate supply or SRAS equation is denoted as Y=1.8-7 where Y and represent the short-run real GDP and the inflation in the short-run respectively. Based on the short-run equilibrium in the goods market, the AD equation has to be equal to SRAS equation.

Therefore, based on the short-run equilibrium condition in the goods market, it can be stated:-

AD=SRAS

82-0.8=1.8-7

-0.8-1.8=-82-7

-2.6=-89

=-89/-2.6

=34.2307 approximately

Hence, the equilibrium inflation in the short-run would be 34.2307 approximately.

a) Now, plugging the short-run equilibrium value of into the AD equation, we get:-

AD=82-0.8

AD=82-0.8*(34.2307)

AD=82-27.3845

AD=54.6155

Therefore, the short-run equilibrium real GDP in the goods market would be approximately 54.6155 trillions.

c) The long-run output is given as Y=49.15 trillions and the AD equation is AD=82-0.8. Now, based on the long-run equilibrium condition in the long-run, the AD equation would be equal to the long run output.

Thus, based on the long-run equilibrium condition in the goods market, it can be stated

AD=Y

82-0.8=49.15

-0.8=-82+49.15

-0.8=-32.85

=-32.85/-0.8

=41.0625

Therefore, on the basis of the long-run aggregate output given in the question, the expected inflation in the long-run would be 41.0625 approximately.