Chapter 19, Problem 1FRQ

a)

To determine

Whether the economy operates at P₁ and Y₁ in short-run macroeconomic equilibrium.

Explanation of Solution

Yes, the economy operates at P₁ and Y₁ in short-run macroeconomic equilibrium because the economy operates at a point that lies at the intersection of short-run aggregate supply and aggregate demand.

Economics Concept Introduction

Introduction: An economy of the country is a system of trade through which wealth is made and used in the country, such as consumption and production of goods.

In short-run macroeconomics, wages and prices do not impact the economic conditions but the period of long-run macroeconomics affects the economic conditions.

b)

To determine

Whether the economy operates at P₁ and Y₁ in long-run macroeconomic equilibrium.

Explanation of Solution

No, the economy operating at P₁ and Y₁ is not in long-run macroeconomic equilibrium because the short-run equilibrium only occurs at a level or point where the aggregate level of output would not be equal to the potential output. But in this case, it occurs where both levels of output (aggregate and potential) are equal.

Economics Concept Introduction

Introduction: An economy of the country is a system of trade through which wealth is made and used in the country, such as consumption and production of goods.

In short-run macroeconomics, wages and prices do not impact the economic conditions but the period of long-run macroeconomics affects the economic conditions.

c)

To determine

The gap exists in the economy.

Explanation of Solution

It is an inflationary gap because, in the economy which is operating at P₁ and Y_1, a difference exists between the current level of real GDP and GDP at the level of full employment.

Economics Concept Introduction

Introduction: An economy of the country is a system of trade through which wealth is made and used in the country, such as consumption and production of goods.

In short-run macroeconomics, wages and prices do not impact the economic conditions but the period of long-run macroeconomics affects the economic conditions.

d)

To determine

What would happen to the size of the output gap in the long run when the economy operates at P₁ and Y_1?

Explanation of Solution

The size of the output gap, in the long run, will decrease and approach zero when the economy operates at P₁ and Y₁ because the economy runs at its inefficient rate.

Economics Concept Introduction

Introduction: An economy of the country is a system of trade through which wealth is made and used in the country, such as consumption and production of goods.

In short-run macroeconomics, wages and prices do not impact the economic conditions but the period of long-run macroeconomics affects the economic conditions.