Question
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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