a. If the actual price level exceeds the expected price level reflected in
long-term contracts, real GDP equals ____________ and the actual
price level equals _____________ in the short run.
b. The situation described in part (a) results in a(n)
_________________ gap equal to ___________.
c. If the actual price level is lower than the expected price level
reflected in long-term contracts, real GDP equals _____________
and the actual price level equals _____________ in the short run.
d. The situation described in part (c ) results in a(n)
____________ gap equal to ___________.
I have the feeling I am missing something. Are the questions referring to some graph which I don't see??
It says to, "Answer the following
questions on the basis of the following graph", but there is no graph, so i don't know how to answer it.
a. If the actual price level exceeds the expected price level reflected in long-term contracts, real GDP equals the potential GDP and the actual price level equals the actual price level in the short run.
b. The situation described in part (a) results in a positive inflationary gap equal to the difference between the actual price level and the expected price level.
c. If the actual price level is lower than the expected price level reflected in long-term contracts, real GDP equals the potential GDP and the actual price level equals the actual price level in the short run.
d. The situation described in part (c) results in a negative deflationary gap equal to the difference between the expected price level and the actual price level.
a. If the actual price level exceeds the expected price level reflected in long-term contracts, real GDP equals the natural level of real GDP and the actual price level equals the higher-than-expected price level in the short run.
To understand this, we need to look at the concept of the natural level of real GDP. The natural level of real GDP refers to the level of output that the economy produces when it is operating at its full potential, using all available resources efficiently. This level is determined by factors such as the availability of labor, capital, and technology.
When the actual price level exceeds the expected price level in long-term contracts, it means that prices are higher than what was anticipated. This can happen due to factors such as changes in production costs or an increase in aggregate demand. However, it does not affect the natural level of real GDP, which is determined by the underlying productive capacity of the economy.
b. The situation described in part (a) results in an inflationary gap equal to the excess of actual real GDP over the natural level of real GDP.
An inflationary gap occurs when the actual level of real GDP exceeds the natural level of GDP, leading to upward pressure on prices. In this case, the higher-than-expected price level in the short run contributes to the upward pressure on prices, resulting in inflationary pressures.
c. If the actual price level is lower than the expected price level reflected in long-term contracts, real GDP equals the natural level of real GDP and the actual price level equals the lower-than-expected price level in the short run.
When the actual price level is lower than expected, it means that prices are lower than what was anticipated. This can happen due to factors such as a decrease in production costs or a decrease in aggregate demand. However, it does not affect the natural level of real GDP.
d. The situation described in part (c) results in a recessionary gap equal to the shortfall of actual real GDP below the natural level of real GDP.
A recessionary gap occurs when the actual level of real GDP is below the natural level of GDP, indicating an underutilization of the economy's productive capacity. In this case, the lower-than-expected price level in the short run contributes to downward pressure on prices, which can be an indicator of a weak economy and a potential recessionary period.