1.Consider an economy described by the following: AD: Y = 2250 10P, AS: P = 125+0.1Y. (a) What are the short-run equilibrium values for real GDP and the price level?

(b) Assume potential output is 500 and draw an AD/AS/YP diagram to show the initial short-run equilibrium real GDP, price level and potential output.

(c) Changes in international market conditions drive up prices for crude oil and base metals. Increased production costs driven by these higher input prices raise the general price level by 5 at every level of output. Write the equation of the new AS curve. What are the new short-run equilibrium real GDP and price level?

(d) Draw the new AS curve in your diagram for (b). What is the size of the output gapr?