Refer to the table below Real Output Demanded Billions 504 5

Refer to the table below Real Output Demanded, Billions 504 507 510 513 516 Real Output Supplied, Billions 515 512 510 507 500 Price Level 108 104 100 96 92 Suppose that aggregate demand increases such that the amount of real output demanded rises by $11 billion at each price level Instructions: Enter your answers as whole numbers a. By what percentage will the price level increase? percent Will this inflation be demand-pull inflation or will it be cost-push inflation? | (Click to b. 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? $ billion C. If the government wants to use fiscal policy to counter the resulting inflation without changing tax rates, would it increase government spending or decrease it? (Click to

Solution

After the increase in real output demanded by $11 billion at each price level we see that the new equilibrium is $515 billion (quantity demanded equals quantity supplied) at the price level 108.

The price level increase is 8% ( (108 - 100)/100 = 0.08 (or 8%))

Since this inflation is the result of an increase in aggregate demand this is demand-pull inflation.

If potential real GDP (= full-employment GDP) is $510 billion, the size of the positive GDP gap after the change in aggregate demand is $5 billion (= $515 billion - $510billion).

If government wants to use fiscal policy to counter this inflation without changing taxrates, it would decrease government spending.

Real OutputDemanded(ORIGINAL)	Real OutputDemanded(NEW)	Price Level	Real Output Supplied
504	515	108	515
507	518	104	512
510	521	100	510
513	524	96	507
516	527	92	500