Suppose the aggregate demand and short-run aggregate supply schedules for a hypothetical economy are as shown below:
(a) What will be the equilibrium price and real output level in this hypothetical economy? Is this level of real GDP also the full-employment level of output? Explain.(b) Why won't a price level of 100 be the equilibrium price level? Why won't a price level of 110 index be the equilibrium price level?
(c) Suppose aggregate demand increases by $120 billion at each price level.What will be the new equilibrium price and output levels?
(d) What factors might cause aggregate demand to increase?
(e) Suppose short-run aggregate supply increases by $120 billion at each price level.What will be the new equilibrium price and output levels?
Definitions:
Inflation Premium
The additional interest rate that lenders demand to compensate for the loss of purchasing power of money due to inflation.
Yield Curve
The relationship between interest rates and the term of debt, generally expressed graphically. A normal yield curve is upsloping, reflecting rates that increase with increasing term. An inverted curve is downsloping.
Liquidity Premiums
Additional yield that investors require for holding securities with lower liquidity.
Maturity Risk Premium
The additional interest rate or yield that investors demand to hold longer-maturity debt over shorter-term instruments.
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