Question 1

In France, potential GDP is 3 000 billion Euros. The following table shows Japan's aggregate demand and short-run aggregate supply schedules.

Price level

Real GDP demanded

(trillions of yen)

Real GDP supplied in the short-run

(trillions of yen)

80

3400

3000

90

3300

3100

100

3200

3200

110

3100

3300

120

3000

3400

130

2900

3500

140

2800

3600

a)Draw a graph of the aggregate demand, short-run aggregate supply and long-run aggregate supply curves.

b)What are the short-run equilibrium real GDP and price level?

c)Does France have an inflationary gap or a recessionary gap and what is its magnitude?

d)Explain what will happen in the long-run.

e)What are the long-run equilibrium real GDP and price level?