5. Macroeconomic equilibrium and the multiplier effect The following graph shows a hypothetical economy in shortrun equilibrium at an output level of $40!] billion and a price level of lll. Suppose that potential GDP in this economy is 331"] billion. Use the grey line [star symbol) to plot the longrun aggregate supply (LRAS) curve on the graph. 2M! 0 1?! \"'3 an 1H q? ._l 125 AS 5 -l '1\" ---------+ + L" I 9 I E m I Patentlal one I 5., I I I 35 I I I] El 100 2E0 Bill] 400 BED ml] m DEG REAL GDP [Billions ot dollars} Based on the graph, this economy is experiencing [an expansionary or recessionary gap?) . The size of the of the gap is $_ bllion. Shift the aggregate demand [AD] curve to illustrate how potential output in this economy can be restored. To eliminate the GDP gap in this economy, the aggregate demand curve must shift to the {right or left?] by $ billion at each price leyel. Suppose that each $100 increase in disposable income causes consumption spending in the economy to rise by $35. The economy's marginal propensity to consume {MPCl is {0.20, 0.40, [1.25, 0.?5] . which means that the