9 points Print b If real GDP in an economy is currently 220

9 points Print b. If real GDP in an economy is currently $220, will the economy\'s real GDP rise, fall, or stay the same? to

Solution

A.

Equilibrium GDP = Ca + Ig + G + Xn = 110+60+30-10

Equilibrium GDP = $190

B.

Real GDP will fall, because equilibrium GDP is $190 and it is less than $220.

C.

Equilibrium GDP = 160 + 60 + 30 – 10 = $240

Since equilibrium GDP is higher than the potential GDP level, there is an expansionary gap. It will create demand pull inflation and short run aggregate supply curve will shift to the left. It will increase the price level and economy will be back to the potential output level.

There is an inflationary expenditure gap, and employment levels are above the full employment level.