Consider an economy with the following aggregate demand(AD) and aggregate supply(AS) schedules. These schedules reflect the fact that, prior to the period we're examining, decisions makers entered into contracts and made choices anticipating that the price level would be P105.
AD(in trillions)-Price Level----SRAS(in trillions)
$5.1_____________95_____________$3.5
4.9______________100_____________3.8
4.7______________105_____________4.2
4.5______________110_____________4.5
4.3______________115______________4.8
a.) Indicate the quantity of GDP that will be produced and the price level that will emerge during this period.
b.)is the economy in long-run equilibrium? Why or Why not?
c.)How will the unemployment rate during the current period compare with this economy's natural rate of unemployment?
d.) What will tend to happen to resource prices in the future? How will this affect the equilibrium rate of output?
e.) Will the rate of GDP produced during this period be sustainable into the future? Why or why not?
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a) To find the quantity of GDP that will be produced and the price level, we need to find the point where the aggregate demand (AD) equals the short-run aggregate supply (SRAS). Looking at the given schedules, we see that at a price level of 105, the AD is 4.7 trillion and the SRAS is 4.2 trillion. Therefore, the quantity of GDP that will be produced during this period is 4.2 trillion, and the price level that will emerge is 105.
b) The economy is not in long-run equilibrium because the quantity of GDP produced (4.2 trillion) is below the full employment level of output. In long-run equilibrium, the economy would be producing at its potential or full employment level of output.
c) The unemployment rate during the current period will be higher than the economy's natural rate of unemployment. This is because the quantity of GDP produced is below the full employment level of output, meaning there are more unemployed workers than the natural rate of unemployment would suggest.
d) In the future, resource prices are likely to adjust to reflect the lower quantity of GDP being produced. If there is excess supply of resources due to lower production, resource prices may decrease. This adjustment would help bring the economy back to long-run equilibrium. The equilibrium rate of output would increase as resource prices decrease, allowing firms to produce more output.
e) The rate of GDP produced during this period is not sustainable into the future. This is because the economy is not producing at its potential or full employment level of output. In the long run, resources and labor are fully utilized, and the economy operates at its highest level of sustainable output. Therefore, in order to sustain the rate of GDP produced during this period in the future, the economy needs to adjust and reach long-run equilibrium.
a.) To determine the quantity of GDP produced and the price level that will emerge during this period, we need to find the intersection of the aggregate demand (AD) and aggregate supply (AS).
From the given information, we can see that at a price level of 105, the aggregate demand is 4.7 trillion and the aggregate supply is 4.2 trillion. Therefore, the quantity of GDP produced during this period will be 4.2 trillion, and the price level will be 105.
b.) To determine if the economy is in long-run equilibrium, we need to compare the actual GDP with the potential GDP. Potential GDP is the level of output that can be sustained without causing inflationary or deflationary pressures. In this case, there is no information given about potential GDP, so we cannot determine if the economy is in long-run equilibrium.
c.) To compare the unemployment rate during the current period with the natural rate of unemployment, we need to know the natural rate of unemployment. Unfortunately, this information is not provided, so we cannot determine the comparison.
d.) The given information does not provide any details about the future resource prices. Without this information, it is not possible to determine what will happen to resource prices or how they will affect the equilibrium rate of output in the future.
e.) The sustainability of the rate of GDP produced during this period depends on multiple factors such as technological advancements, resource availability, and effective management of resources. With the given information, it is not possible to determine if the rate of GDP produced will be sustainable into the future. Additional analysis and information are required to make a conclusion on the sustainability of GDP.