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Chapter 12: Q5. (page 259)

Refer to the data in the table that accompanies problem 2. Suppose that the present equilibrium price level and level of real GDP are 100 and \(225, and that data set B represents the relevant aggregate supply schedule for the economy.

(A)(B)(C)
Price LevelReal GDPPrice LevelReal GDPPrice LevelReal GDP
110275100200110225
100250100225100225
9522510025095225
9020010027590225
  1. What must be the current amount of real output demanded at the 100 price level?
  2. If the amount of output demanded declined by \)25 at the 100 price level shown in B, what would be the new equilibrium real GDP? In business cycle terminology, what would economists call this change in real GDP?

Short Answer

Expert verified

  1. The real output demanded will be $225.

  2. The new equilibrium is at $200 of real GDP. The change in real GDP is due to the recession.

Step by step solution

01

Amount of real output demanded

At equilibrium, the quantity supplied is equal to the quantity demanded.

Since the equilibrium is at 100 price level and $225 real GDP, the current real output demanded must be $225.

02

Change in equilibrium and technical terminology for the change

Since the output demanded falls by $25 at constant prices, the quantity supplied will also fall by $25.Thus, the new equilibrium will fall to $200 of real GDP.

The real output always declines in a recession. So, the decline in the real GDP will be referred to as the recession.

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Most popular questions from this chapter

At the current price level, producers supply \(375 billion of final goods and services while consumers purchase \)355 billion of final goods and services. The price level is:

  1. above equilibrium.
  2. at equilibrium.
  3. below equilibrium.
  4. more information is needed.

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?

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?

True or False. If the price of oil suddenly increases by a large amount, AS will shift left, but the price level will not rise thanks to price inflexibility.

In early 2001 investment spending sharply declined in the United States. In the 2 months following the September 11, 2001 attacks on the United States, consumption also declined. Use AD-AS analysis to show the two impacts on real GDP.
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