Use the figure on the next page to answer the follow questions.

Assume that the economy initially is operating at price level 120 and real output level $870. This output level is the economy’s potential (or full-employment)

level of output. Next, suppose that the price level rises from 120 to 130.

By how much will real output increase in the short run? In the long-run? Instead, now assume that the price level dropped from 120 to 110.

Assuming flexible product and resource prices, by how much will real output fall in the short run? In the long run? What is the long-run level of output at each of the three price levels shown? LO1

Transcribed Image Text:

Price level 130 AS3 AS2 20 120 110 0 850 870 890 Real output (dollars) ASI