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 110 be the equilibrium price level? Why won't a price level of 130 index be the equilibrium price level?
(c)Suppose aggregate demand increases by $400 billion at each price level.What will be the new equilibrium price and output levels?
(d)What factors might cause aggregate demand to increase?
Definitions:
Natural State
Often refers to the condition of human beings and society before the establishment of formal laws and social structures, suggesting an innate nature of existence.
Tabula Rasa
A theory that individuals are born without built-in mental content, and therefore all knowledge comes from experience or perception.
Blank Slate
The theory that individuals are born without built-in mental content, and all knowledge comes from experience or perception.
Specific Knowledge
Knowledge that is detailed, specialized, and particular to a specific field or subject matter.
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