Refer to the table below.Real Output Demanded, BillionsPrice Level Real Output Supplied, Billions$ 506108$ 5135081045125101005105129650751492502Instructions: Enter your anwers as whole numbers. A). What is the equilibrium level of output? What is the equilibrium price level? B). Suppose that aggregate demand increases such that the amount of real output demanded rises by $ 7 billion at each price level. Insert the new values for real output demanded in the table below.Real Output Demanded, BillionsNew Real Output Demanded, BillionsPrice LevelReal Output Supplied, Billions$ 506 108$ 513508 104512510 100510512 96507514 92502What is the new equilibrium level of output? What is the new equilibrium price level? By what percentage will the price level increase? Will this inflation be demand-pull inflation or will it be cost-push inflation?C) If potential real GDP ( that is, full-employment GDP) is $ 510 billion, what will be the size of the positive GDP gap after the change in aggregate demand?If government wants to use fiscal policy to counter the resulting inflation without changing tax rates, would it increase governmnet spending or decrease it?

Question
Asked Nov 4, 2019

Refer to the table below.

Real Output Demanded, Billions Price Level  Real Output Supplied, Billions
$ 506 108 $ 513
508 104 512
510 100 510
512 96 507
514 92 502

Instructions: Enter your anwers as whole numbers. 

A). What is the equilibrium level of output? What is the equilibrium price level? 

B). Suppose that aggregate demand increases such that the amount of real output demanded rises by $ 7 billion at each price level. Insert the new values for real output demanded in the table below.

Real Output Demanded, Billions New Real Output Demanded, Billions Price Level Real Output Supplied, Billions
$ 506   108 $ 513
508   104 512
510   100 510
512   96 507
514   92 502

What is the new equilibrium level of output? 

What is the new equilibrium price level? 

By what percentage will the price level increase? 

Will this inflation be demand-pull inflation or will it be cost-push inflation?

C) If potential real GDP ( that is, full-employment GDP) is $ 510 billion, what will be the size of the positive GDP gap after the change in aggregate demand?

If government wants to use fiscal policy to counter the resulting inflation without changing tax rates, would it increase governmnet spending or decrease it? 

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Expert Answer

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Step 1

(a) Equilibrium exists when the quantity demanded is equal to the quantity supplied. At equilibrium, there is no surplus or shortage in the market.  As shown in the table, quantity demanded is equal to the quantity supplied at price level of $100. So, the equilibrium price is $100 and the equilibrium quantity is 510 billion.

Step 2

(b) The table below shows the new real output demanded:

Real Output Demanded New Real Output
Demanded
506+7=513
Real Output Supplied
Price Level
506
508
510
512
108
513
508 7=515
510+7=517
512+7=519
514+7 = 521
104
512
510
100
96
507
514
92
502
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Image Transcriptionclose

Real Output Demanded New Real Output Demanded 506+7=513 Real Output Supplied Price Level 506 508 510 512 108 513 508 7=515 510+7=517 512+7=519 514+7 = 521 104 512 510 100 96 507 514 92 502

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Step 3

The new real output demanded is equal to the real output supplied at price level $108.

So, the new equilibrium price is 108 and the new equ...

New Price - Old Price
x 100
Old Price
108 -100
-x100
100
-x100
100
=8%
Therefore, the price level increases by 8%
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New Price - Old Price x 100 Old Price 108 -100 -x100 100 -x100 100 =8% Therefore, the price level increases by 8%

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