Question

The following table shows the real output demanded and supplied at various price levels in a hypothetical economy.

Real Output Demanded	Price Level	Real Output Supplied (Billions of dollars)
(Billions of dollars)	(Index number)	(Billions of dollars)
5	90	70
10	60	65
20	30	50
40	20	40
70	10	10

On the following graph, use the blue points (circle symbols) to plot the aggregate demand (Initial AD) curve for the economy. Then use the orange points (square symbols) to plot the short-run aggregate supply (SRAS) curve for the economy.

Note: Line segments will automatically connect the points.

Initial ADSRASNew AD020406080100100806040200PRICE LEVEL (Billions of dollars)REAL GDP (Index numbers)

The equilibrium price level is   , and the equilibrium level of real output is   .

Suppose that the government spending increases by $10 billion and the expenditure multiplier in this economy is 3.

On the previous graph, use the purple points (diamond symbols) to illustrate the effect of the increase in government spending on the aggregate demand (New AD) curve.

The change in government spending   the equilibrium level of real output by   .

Answer 1

The equilibrium price level is 20 and equilibrium level of real output is 40 billion dollars. (The equilibrium price and real output is achieved by the interaction of the AD and SRAS curve)

Given that the government spending increases by $10 billion and the expenditure multiplier is 3. Thus the increase in the aggregate demand will be $30 billion at each price level.

Price level	Real output demanded(AD)	New Real output demanded ( New AD)	Real output supplied (SRAS)
90	5	35	70
60	10	40	65
30	20	50	50
20	40	70	40
10	70	100	10

The new equilibrium price is 30 and equilibrium level of real output is 50 billion dollars.

The change in government spending increases the equilibrium level of output by 10 billion dollars.