The table sets out an economys aggregate demand and aggregat

The table sets out an economy’s aggregate demand and aggregate supply schedules.

1) What is the macroeconomic equilibrium?

2)If potential GDP is $600 billion, what is the type of macroeconomic equilibrium or what kind of gap is the economy experiencing? Explain. (4 points)

Price level
(GDP
price index)

Real GDP
demanded

Real GDP
supplied

(billions of 2009 dollars)

90

900

   600

100

850

   700

110

800

   800

120

750

   900

130

700

1,000

Solution

1). The equilibrium is where the real GDP demanded is equal to the real GDP supplied. At the price level of 110 the real GDP demanded is equal to the real GDP supplied and that is the equilibrium.

2). If the potential GDP is 600, there exists an inflationary gap. The inflationary gap occurs in the economy when the real GDP is greater than the potential GDP. Here the potential GDP is 600 and the real GDP is 800, so there should be an inflationary gap.