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Chapter 10: Q. 2 (page 228)

Suppose that the long-run aggregate supply curve is positioned at a real GDP level of $18trillion in base-year dollars, and the long-run equilibrium price level (in index number form) is 115 . What is the full-employment level of nominal GDP?

Short Answer

Expert verified

As a conclusion, the nominal GDP rate of full employment in the economy is $20.7trillion.

Step by step solution

01

Aggregate demand curve.

When the demand and supply curves in the economy intersect, the economy is said to be in equilibrium. When the aggregate demand curve (AD) and the long run supply curve (LRAS) cross, this condition of equilibrium is reached.

02

Equilibrium with the LRAS.

The status of the long run equilibrium with the LRAS and the AD curve is depicted in the diagram below, along with the price and real GDP numbers.

The xaxis in the above graph represents the economy's real GDP level, while the xaxis represents the current price levels. The price level is 115dollars and the total real expenditure is 18trillion dollars in the long run equilibrium.

03

Step 3:  Real GDP.

The real GDP in the base year, as well as the price level, are required to compute the nominal GDP in the economy. The following is a calculation for the same:

NominalGDP=$18trillion脳115100

=$20.7trillion

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Most popular questions from this chapter

In Ciudad Barrios, El Salvador, the latest payments from relatives working in the United States have finally arrived. When the credit unions open for business, up to 150 people are already waiting in line. After receiving the funds their relatives have transmitted to these institutions, customers go off to outdoor markets to stock up on food or clothing or to appliance stores to purchase new refrigerators or televisions. Similar scenes occur throughout the developing world, as each year migrants working in higher-income, developed nations send around $200 billion of their earnings back to their relatives in less developed nations. Evidence indicates that the relatives, such as those in Ciudad Barrios, typically spend nearly all of the funds on current consumption.

a. Based on the information supplied, are developing countries' income inflows transmitted by migrant workers primarily affecting their economies' long-run aggregate supply curves or aggregate demand curves?

b. How are equilibrium price levels in nations that are recipients of large inflows of funds from migrants likely to be affected? Explain your reasoning.

Identify the combined shifts in long-run aggregate supply and aggregate demand that could explain the following simultaneous occurrences,

a. An increase in equilibrium real GDP and an increase in the equilibrium price level

b. A decrease in equilibrium real GDP with no change in the equilibrium price level

c. An increase in equilibrium real GDP with no change in the equilibrium price level

d. A decrease in equilibrium real GDP and a decrease in the equilibrium price level

Explain why the aggregate demand curve slopes downward and list key factors that cause this curve to shift

10-13. Explain whether each of the following events would cause a movement along or a shift in the ADcurve, other things being equal. In each case, explain the direction of the movement along the curve or shift in its position.

a. Deflation has occurred during the past year.

b. Real GDP levels of all the nation's major trading partners have declined.

c. There has been a decline in the foreign exchange value of the nation's currency,

d. The price level has increased this year.

Suppose that there is a sudden rise in the price level. What will happen to economywide planned spending on purchases of goods and services? Why?
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