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Assume that the full-employment GDP of a country is $780 and that the aggregate demand and aggregate supply are as shown below: Aggregate Quantity Demanded

Assume that the full-employment GDP of a country is $780 and that the aggregate demand and aggregate supply are as shown below:

Aggregate Quantity Demanded Price Index Aggregate Quantity Supplied
830 106 640
810 107 650
790 108 670
770 109 700
750 110 750
730 111 790
710 112 840
690 113 900

a) Is this country in a long run or short run equilibrium? Explain how you know. (1 marks)

b) Is there a recessionary gap or an inflationay gap? If so, what size is the gap? (1 mark)

c) Suppose that a hurricane hits parts of the country reducing its aggregate supply by $60. What will be the new values of equilibrium GDP and the price level? (2 marks)

d) What type of gap will exist after the flooding? How do you know? (1 mark)

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