Suppose the Potential Level of Real GDP for a Hypothetical

question 19

Essay

Suppose the potential level of real GDP for a hypothetical economy is $160 and the price level (P) initially is 200.Use the following short-run aggregate supply schedules to answer the questions. (a) What will be the short-run level of real GDP if the price level rises unexpectedly from 200 to 210 because of an increase in aggregate demand? Falls unexpectedly from 200 to 190 because of a decrease in aggregate demand? Explain each situation.(b) What will be the long-run level of real GDP when the price level rises from 200 to 210? Falls from 200 to 190? Explain each situation.

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Definitions:

Negative Externality

A cost that affects a party who did not choose to incur that cost, often a byproduct of production or consumption.

Public Good

A good that is non-excludable and non-rivalrous, meaning individuals cannot be effectively excluded from its use and one person's use does not reduce availability to others.

Total Damage

The cumulative impact or cost resulting from an event or series of events, often used in the context of natural disasters or accidents.

Efficient Level

A state where resources are allocated in a way that maximizes the production of goods and services, without any waste of resources.