6. Macroeconomic equilibrium and the ranges of the aggregate supply curve The following graph shows the aggregate demand (AD₁) and aggregate supply (AS) curves for a hypothetical economy with Natural Real GDP of $11 trillion. The Simple Keynesian Model AD₁ 130 AD ₂ + New Eq 8.0 8.5 9.0 9.5 10.0 10.5 11.0 11.5 12.0 REAL GDP (Trillions of dollars) Suppose consumers and businesses become less optimistic about future economic conditions, causing aggregate demand to decrease by a total $1.5 trillion at each price level (after all multiplier effects have taken place). On the previous graph, use the green line (triangle symbol) to show the new aggregate demand curve (AD2). Be sure that AD2 is parallel to AD₁ (you can mouse over AD₁ to see its slope). Then use the black drop lines (cross symbol) to indicate the new macroeconomic equilibrium after the shift of aggregate demand. range of the aggregate supply curve, causing the equilibrium price The decrease in aggregate demand leads to a movement along the level to , and the equilibrium level of Real GDP to PRICE LEVEL 125 120 115 110 105 100 95 90 AS

6. Macroeconomic equilibrium and the ranges of the aggregate supply curve The following graph shows the aggregate demand (AD₁) and aggregate supply (AS) curves for a hypothetical economy with Natural Real GDP of $11 trillion. The Simple Keynesian Model AD₁ 130 AD ₂ + New Eq 8.0 8.5 9.0 9.5 10.0 10.5 11.0 11.5 12.0 REAL GDP (Trillions of dollars) Suppose consumers and businesses become less optimistic about future economic conditions, causing aggregate demand to decrease by a total $1.5 trillion at each price level (after all multiplier effects have taken place). On the previous graph, use the green line (triangle symbol) to show the new aggregate demand curve (AD2). Be sure that AD2 is parallel to AD₁ (you can mouse over AD₁ to see its slope). Then use the black drop lines (cross symbol) to indicate the new macroeconomic equilibrium after the shift of aggregate demand. range of the aggregate supply curve, causing the equilibrium price The decrease in aggregate demand leads to a movement along the level to , and the equilibrium level of Real GDP to PRICE LEVEL 125 120 115 110 105 100 95 90 AS

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter11: Fiscal Policy

Section: Chapter Questions

Problem 1.8P

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Suppose that the aggregate demand and aggregate supply schedules for a hypothetical economy are as shown below: a. Use these sets of data to graph the aggregate demand and aggregate supply curves. What is the equilibrium price level and the equilibrium level of real output in this hypothetical economy? Is the equilibrium real output also necessarily the full-employment real output? Explain.b. Why will a price level of 150 not be an equilibrium price level in this economy? Why not 250?c. Suppose that buyers desire to purchase $200 billion of extra real output at each price level. Sketch in the new aggregate demand curve as AD1. What factors might cause this change in aggregate demand? What is the new equilibrium price level and level of real output?
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Real GDP Real GDPDemanded, Price Level Supplied,Billions (Price Index) Billions$100 300 $450200 250 400300 200 300400 150 200500 100 100 Use these sets of data to graph the aggregate demandand aggregate supply curves. What is the equilibriumprice level and the equilibrium level of real output inthis hypothetical economy? Is the equilibrium real output also necessarily the full-employment real output?Explain.b. Why will a price level of 150 not be an equilibriumprice level in this economy? Why not 250?c. Suppose that buyers desire to purchase $200 billion ofextra real output at each price level. Sketch in the newaggregate demand curve as AD1. What factors mightcause this change in aggregate demand? What is thenew equilibrium price level and level of real output?
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