The Table Above Shows Purplelandʹs Economy Aggregate Demand and Supply

Question

Examlex · Accepted Answer

The Answer is See the figure above. The aggregate demand curve is AD₀.
b) A short-run macroeconomic equilibrium occurs where the aggregate demand curve, AD₀, intersects the
short-run aggregate supply curve, SAS. As the figure shows, the short-run equilibrium real GDP is $600 billion, and the short-run equilibrium price level is 100.
c) Long-run equilibrium real GDP equals potential GDP. So the long-run equilibrium real GDP in Purpleland is
$675 billion.
d) Purplelandʹs short-run macroeconomic equilibrium is a below full-employment equilibrium because the short-run equilibrium GDP is less than potential GDP. The amount by which potential GDP exceeds real GDP is a
recessionary gap, so the recessionary gap is $75 billion. An inflationary gap exists when real GDP is above potential GDP, so there is no inflationary gap in Purpleland.
e) As the figure above shows, the aggregate demand curve shifts from AD₀to AD₁. As a result, real GDP increases from $600 billion to $675 billion, and the price level rises from 100 to 110.
f) Purplelandʹs new short-run macroeconomic equilibrium is a full-employment equilibrium because the equilibrium real GDP equals the potential GDP. When real GDP equals potential GDP, there is neither a recessionary gap nor an inflationary gap.

The Table Above Shows Purplelandʹs Economy Aggregate Demand and Supply

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