Question

The table below shows aggregate demand and aggregate supply schedules in a hypothetical economy, Acadia.

Aggregate Demand and Aggregate Supply Schedules for Acadia
	Real GDP
	(AD0)	(AD1)	(AS0)	(AS1)
Price Level (2012 = 100)	(2012 $ billions)
125	180	205	220	245
120	190	215	215	240
115	200	225	200	225
110	210	235	185	210
105	220	245	165	190

a. Draw a graph showing Acadia's AD₀, AD₁, AS₀ and AS₁. Using the tools given below plot only the endpoints of the demand curves AD₀ and AD₁. Plot all 5 points for each supply curve, AS₀ and AS₁.

b. Initially AD₀ and AS₀ are the relevant schedules.

   The equilibrium price level is  and equilibrium real output is $  billion.

   If the price level is 125 then real output is $  billion, real expenditures are $  billion, and there is an unintended  (Click to select)  decrease  increase  in inventories. This pushes the price level  (Click to select)  down  up  .

   If the price level is 110 then real output is $  billion, real expenditures are $  billion, and there is an unintended  (Click to select)  decrease  increase  in inventories. This pushes the price level  (Click to select)  down  up  .

c. Now aggregate demand shifts from AD₀ to AD₁ while aggregate supply remains at AS₀.

   Aggregate demand has undergone a(n)  (Click to select)  decrease  increase  . As a result the equilibrium price level  (Click to select)  decreases  stays the same  increases  and has a value of  while equilibrium real output  (Click to select)  decreases  stays the same  increases  and has a value of $  billion.

d. Now aggregate supply shifts from AS₀ to AS₁, while aggregate demand remains at AD₀.

   Aggregate supply has undergone a  (Click to select)  short-run decrease  short-run increase  long-run decrease  long-run increase  . As a result the equilibrium price level  (Click to select)  decreases  stays the same  increases  and has a value of  while equilibrium real output  (Click to select)  decreases  stays the same  increases  and has a value of $  billion.

Answer 1

a)

b) The equilibrium price level is 115 and equilibrium real output is $ 200 billion.
If the price level is 125 then real output is $ 220 billion, real expenditures are $ 180 billion, and there is an unintended increase in inventories. This pushes the price level down

The equilibrium price and output is equal to 115 and 200 respectively because the real output at this level is equal to the real expenditure. When price rises to 125, the real output rises and real expenditure falls as can be observed in the given schedule. Thus there is an increase in inventory as some quantity wouldnot be not sold due lower real expenditure. This would push the price level down to increase expenditure.

If the price level is 110 then real output is $185real expenditures are $ 210billionand there is an unintended decrease in inventories. This pushes the price level up.

When price falls to 110, the real output falls and real expenditure rises as can be observed in the given schedule. Thus there is an decrease in inventory as there is excess demand. this would push the price level up.

c) Aggregate demand has undergone an increase. As a result the equilibrium price level increases  and has a value of 120 le equilibrium real output increases and has a value of $215 blillion

The values of AD at each price level has increased. Thus the equilibrium price increases as real output and real expenditure intersect at higher level of output and price.

d) Aggregate supply has undergone a short-run increase . As a result the equilibrium price level decreases and has a value of 110 le equilibrium real output decreases and has a value of $ 210 billion.

The values of AS at each price level has increased. Thus the equilibrium price decreases as real output and real expenditure intersect at a lower level of output and price.