Question

	(A) (B) (C) Price Level Real GDP Price Level Real GDP Price Level Real GDP 110 290 100 215 110 240 100 265 100 240 100 240 95 240 100 265 95 240 90 215 100 290 90 240

a. Which set of data illustrates aggregate supply in the immediate short-run in North Vaudeville?     

The data in (Click to select)CAB.     

Which set of data illustrates aggregate supply in the short run in North Vaudeville?     

The data in (Click to select)ABC.     

Which set of data illustrates aggregate supply in the long run in North Vaudeville?     

The data in (Click to select)CAB.

b. Assuming no change in hours of work, if real output per hour of work decreases by 20 percent, what will be the new levels of real GDP in the right column of A?     

Instructions: Round your answers to 2 decimal places.       

With a price level of 110, new output = .     

With a price level of 100, new output = .     

With a price level of 95, new output = .     

With a price level of 90, new output = .     

Does the new data reflect an increase in aggregate supply or does it indicate a decrease in aggregate supply? (Click to select)DecreaseIncrease.

Answer 1

a. The data set 'B' illustrate aggregate supply in immediate short run in North Vaudeville. Because in very short run the nominal wages, input prices and prices are fixed. The aggregate supply curve is horizontal in very short run. The firms collectively supply the amount which is demanded. For this reason data set B shows fixed price and various levels of output.

The data set 'A' illustrates aggregate supply in short run in North Vaudeville. Because in short run aggregate supply curve is upward sloping. In short run nominal wages and input prices adjust slowly to change in the price level. This phenomenon matches with data set A. Here Real GDP increases with increase in price level.

The data set 'C' illustrates aggregate supply in the long run. Because in long run aggregate supply is vertical because the economy reach at full employment level of output. Here the rise in wages and input prices will match with the changes in price level. Whatever be the price level output or real GDP is fixed at 240.

So, in very short run - Data set B, In short run data set - A, In long run data set - C.

b. If there is no changes in hours of work and if real output per hours of work decrease by 20% then total real GDP will decrease by 20% at every level of price. So if real GDP decrease by 20% it will be 80% of initial output. So new levels of real GDP in column A will be as follows-

Price level	Initial real GDP	New real GDP or new output
110	290	0.80*290 =232
100	265	0.80*265=212
95	240	0.80*240=192
90	215	0.80*215=172

The new data set represent decrease in aggregate supply. Because at every price there has been decrease in aggregate supply.