5. Macroeconomic equilibrium and the multiplier effect

The following graph shows a hypothetical economy in short-run equilibrium at an output level of $400 billion and a price level of 100. Suppose that potential GDP in this economy is $500 billion.

Use the grey line (star symbol) to plot the long-run aggregate supply (LRAS) curve on the graph.

200 O 175 AS AD 150 0 125 AS 100 PRICE LEVEL 75 Potential GDP 50 AD 25 0 100 200 300 400 500 600 700 800 REAL GDP (Billions of dollars) Based on the graph, this economy is experiencing . The size of the of the gap is