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Chapter 12: Q2. (page 259)

Answer the following questions on the basis of the following three sets of data for the country of North Vaudeville:

(A)
(B)
(C)
Price Level
Real GDP
Price Level
Real GDP
Price Level
Real GDP
110275100200110225
100250100225100225
9522510025095225
9020010027590225

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

  2. Assuming no change in hours of work, if real output per hour of work increases by 10 percent, what will be the new levels of real GDP in the right column of A? Do the new data reflect an increase in aggregate supply or do they indicate a decrease in aggregate supply?

Short Answer

Expert verified

a. Data set B shows immediate short-run aggregate supply. Data set A shows short-run aggregate supply while the long-run aggregate supply is reflected through data set C.

b. The new levels of real GDP are as follows:

(A)
Price Level
Real GDP
110302.5
100275
95247.5
90220

The change in real GDP shows an increase in aggregate supply.

Step by step solution

01

Type of aggregate supply in different sets of data

The following are the reasons:

  • In the immediate short-run, the price level (output price) remains constant.Thus, data set B represents immediate short-run aggregate supply in North Vaudeville.

  • In the short run, the real GDP increases with the price level (output price).Therefore, data set A shows the short-run aggregate supply.

  • The real GDP or output does not increase in the long run; only the price level increase. Hence, data set C depicts the long-run aggregate supply.

02

Change in real output and shift in the AS curve

Let the real output be O. If O increases by 10%, that is, 0.1O, the new output will be as follows:

New Output = O + 0.1O

New Output = 1.1O

Thus, to obtain the new levels of real GDP at each price level in column A, multiply the given real GDP by 1.1. The change in the real GDP is given in the table below.

(A)
Price Level
Real GDP
110302.5 ( = 275 脳 1.1)
100275 ( = 250 脳 1.1)
95247.5 ( = 225 脳 1.1)
90220 ( = 200 脳 1.1)

The new data represents an increase in aggregate supply because real GDP has increased at each price level.

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Most popular questions from this chapter

Suppose that the table presented below shows an economy鈥檚 relationship between real output and the inputs needed to produce that output:

Input QuantityReal GDP
150.0\(400
112.5300
75.0200

  1. What is productivity in this economy?

  2. What is the per-unit cost of production if the price of each input unit is \)2?

  3. Assume that the input price increases from \(2 to \)3 with no accompanying change in productivity. What is the new per-unit cost of production? In what direction would the $1 increase in input price push the economy鈥檚 aggregate supply curve? What effect would this shift of aggregate supply have on the price level and the level of real output?

  4. Suppose that the increase in input price does not occur but, instead, that productivity increases by 100 percent. What would be the new per-unit cost of production? What effect would this change in per-unit production cost have on the economy鈥檚 aggregate supply curve? What effect would this shift of aggregate supply have on the price level and the level of real output?

Suppose that the aggregate demand and aggregate supply schedules for a hypothetical economy are as shown in the following table.

Amount of Real GDP Demanded, BillionsPrice Level (Price Index)Amount of Real GDP Supplied, Billions
\(100300450
200250400
300200300
400150200
500100100

a. Use the data above to graph the aggregate demand and aggregate supply curves. What are the equilibrium price level and the equilibrium level of real output in this hypothetical economy? Is the equilibrium real output also necessarily the full-employment real output?

b. If the price level in this economy is 150, will quantity demanded equal, exceed, or fall short of the quantity supplied? By what amount? If the price level is 250, will the quantity demanded equal, exceed, or fall short of the quantity supplied? By what amount?

c. Suppose that buyers desire to purchase \)200 billion of extra real output at each price level. Sketch in the new aggregate demand curve as AD1. What are the new equilibrium price level and level of real output?

True or False. Decreases in AD normally lead to decreases in both output and the price level.

Use shifts of the AD and AS curves to explain (a) the U.S. experience of strong economic growth, full employment, and price stability in the late 1990s and early 2000s and (b) how a strong negative wealth effect from, say, a precipitous drop in house prices could cause a recession even though productivity is surging.

Explain: 鈥淯nemployment can be caused by a decrease of aggregate demand or a decrease of aggregate supply.鈥� In each case, specify the price-level outcomes.
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