Suppose that an economy has a Potential Real GDP $($Y$*)$ of $$200.$ This economy also has the

following AEF at a p $=100$:

$=200+0\mathrm{.}5$

Note that for every $$2$ increase in p$,$ C $+$ NX decreases by $$2,$ and so this AEF implies an AD of:

$$: $=6002$

AS is also given by: $$: $=0\mathrm{.}5$

$5.$ What is Short$-$Run Equilibrium Real GDP $($Y$)$ and the Short$-$Run Equilibrium Price Level

$($p$)$ in this economy? $$

$6.$ Is this economy in an inflationary gap, recessionary gap, or neither? How do you know?

$$

Suppose now that the Government decided to not take action, and let the economy adjust

naturally on its own through the medium$-$run.

$7.$ What would we expect to happen to Real GDP $($Y$)$ and the price level $($p$)$ in the medium$-$

run? 

$.$ What would be the price level in this economy after this medium$-$run adjustment? Here,

you need to solve for this mathematically. 

Suppose now that the Government does decide to intervene to close this output gap quickly,

using Government Spending.

$9.$ Does the Government need to increase or decrease Government Spending to achieve

this goal? 

$10.$ What would we expect to happen to Real GDP $($Y$)$ and the price level $($p$)$ in the medium$-$

run with this intervention? Explain your answer using the AD$-$AS figure. 

$11.$ What would be the price level in this economy after this medium$-$run adjustment where

the government chooses to intervene? Here, you need to solve for this mathematically.

$$

$12.$ How much does the Government need to change G by to achieve this closing of the

output gap? $$