Q. 9 Between early 2005聽and late 200... [FREE SOLUTION]

Chapter 11: Q. 9 (page 251)

Between early $2005$ and late $2007$ , total planned expenditures by $U . S$ . households substantially increased in response to an increase in the quantity of money in circulation. Explain, from a short-run Keynesian perspective, the predicted effects of this event on the equilibrium $U . S$ price level and equilibrium $U . S$ . real $G D P$ . Be sure to discuss the spending gap that the Keynesian model indicates would result in the short run.

Short Answer

Expert verified

Inflationary gap occurs in the economy as new real $G D P$ of $13.2$ billions per year exceeds the hard stability level of real $G D P$ of $13$ trillion per year.

When optimal real $G D P$ each year surpasses lengthy gross Domestic product $G D P$ or job growth real $G D P$ , an inflationary gap emerges.

Step by step solution

Step: 1 Introduction and sketching:

If total estimated expenditures by households significantly increased in response to a rise in the number of dollars in circulation, the following figure depicts the optimal price level and stability real $G D P$ -

Step: 2 Real GDP:

At point $E_{1}$ , the industry is in equilibrium, with real $G D P$ of role="math" localid="1651544979683" $13$ trillion dollars and a price level of $110$ .

An growth in the value of currency leads to a rise in household total anticipated expenditures.

Household spending is a macroeconomic variable, hence an increase in household spending suggests an economic boom.

The aggregate supply curve will change direction from mathrm $A D_{1}$ to $A D_{2}$ as a result of this increase in economic growth.

New equilibrium is attained at point $E_{2}$ where new aggregate demand curve $A D_{2}$ is intersecting the $S R A S$ curve. Real $G D P$ is $$ 13.2$ trillion and price level is role="math" localid="1651545150006" $115$ .

Step: 3 Growth GDP:

As a result of a significant increase in actual planned expenditure by households in response to a rise in the number of dollars in circulation, the equilibrium price level (from $110 - 115$ ) and equilibrium real GDP have risen (from $$ 13$ trillion to $$ 13.2$ trillion).

When the new real $G D P$ of $13.2$ trillions per year reaches the hard stabilization level $G D P$ of $13$ trillions per year, an inflationary gap emerges in the economy.

An inflationary gap develops when ideal real each year exceeds long-term real gross domestic product or job growth real.