Assume the Economy Is Initially in Equilibrium with Real GDP

question 25

Essay

Assume the economy is initially in equilibrium with real GDP equal to potential GDP and the inflation rate at its target.Use the aggregate demand and aggregate supply model to analyze the short-run and long-run effects on real GDP and inflation when the economy experiences a positive demand shock.

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Definitions:

Perfectly Competitive System

A market structure where many firms offer products or services that are similar, leading to a high level of competition and prices that reflect the true supply and demand.

Allocation of Resources

The process of assigning available resources, both human and material, to specific uses to satisfy the needs and wants of a society.

Equal Distribution

The concept of distributing resources or income in a way that every member of a society gets an equal share.

Marginal Cost

The expense incurred from the manufacture of an extra single unit of a product or service.