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Question 34

Assume that the full-employment GDP of a country is $750 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. (2 marks) b) Suppose that flooding hits parts of the country reducing its aggregate supply by $70. What will be the new values of equilibrium GDP and the price level? (1 mark) c) What type of gap will exist after the flooding? How do you know? (2 marks)