Question

Consider the following table that contains an economy’s aggregate demand (AD) and short run aggregate supply (SAS) schedules.

Price level	AD ($billion)	SAS ($billion)
100	1000	850
110	950	950
120	900	1050
130	850	1200
140	800	1250

A)State the short run macroeconomic equilibrium and explain why this is an equilibrium. If potential GDP for this economy is $1,050 billion, is there an inflationary or recessionary gap, and how large is it?

B)  

Say real GDP supplied falls by $150 billion at every price level. Determine the new SAS schedule and identify the new short run macroeconomic equilibrium. Name one possible reason for SAS falling.

Answer 1

Answer : A) The short run macroeconomic equilibrium is that situation of macroeconomics where AD = SAS occur. It is equilibrium because at AD = SAS the economy neither face excess supply situation nor face the excess demand situation.

If actual real GDP is less than the potential real GDP then the recessionary gap occur. Here the AD = SAS occurs at  $950 billion. So, the actual real GDP is $950 billion. Now if the potential real GDP is $1,050 billion then this indicates that here the actual real GDP is less than the potential real GDP. As a result, here the recessionary gap occurs.

The amount of recessionary gap = Potential real GDP - Actual real GDP = 1,050 - 950 = $100 billion.

Therefore, here the recessionary gap is $100 billion.

B) New SAS schedule after decreasing the real GDP supplied by $150 billion.

Price	New SAS ($ billion)
100	850 - 150 = 700
110	950 - 150 = 800
120	1050 - 150 = 900
130	1200 - 150 = 1050
140	1250 - 150 = 1100

Now the AD = New SAS occurs at $900 billion. Therefore, here the new short run macroeconomic equilibrium real GDP is $900 billion where the price level is 120.

The one reason of falling SAS is following :

1) Excess rain destroy the agricultural products. This decrease the short run aggregate supply of the economy. So, the one possible reason of falling SAS is excess rain.