Suppose the Relationship Between Real GDP and Inflation Is Depicted

question 50

Essay

Suppose the relationship between real GDP and inflation is depicted as shown in the table below. Assume that real and potential GDP are equal to each other at $5,400 billion. Suppose government purchases decline by $100 billion and the slope of the aggregate expenditure line is 0.5. (A)Explain how the AD curve is affected by this change. In the short run, what will real GDP and the rate of inflation be?
(B)Using the AD and IA curves, show what will happen in the medium run. Be sure to give an economic explanation for what is happening.
(C)Using the AD and IA curves, show what will happen in the long run.

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