Refer to the table below Real Output Demanded Real Output Su

Refer to the table below Real Output Demanded, Real Output Supplied, Billions 498 504 510 516 522 Price Level 114 107 100 93 86 Billions 515 512 510 507 500 Suppose that aggregate demand Increases such that the oamount of real output demanded rises by $17 bilion at each price level. Instructions: Enter your answers as a. By what percentage will the price level Increase? whole numbers. percent. Will this Inflatlon be demand-pull inflation or will it be cost-push Inflation?(Click to select) 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?s C the government wants to use scal policy to counter the resulting inflation without changing tax rates would it increase government spending or decrease ? Click to select billion.

Solution

Initial price level = 100 (Where AD = AS)

New price level = 114

Percentage increase = (114 - 100)/100 x 100 = 14%

This is an example of demand pull inflation (AD increases and pushes up the price level)

GDP gap (positive) = New equilibrium GDP - Initial potential GDP = 515 - 510 = $5 bn

Government should decrease spending so as to push AD curve leftwards and reduce price level.

Real output demanded (bn)	Price level	Real output supplied (bn)
515	114	515
521	107	512
527	100	510
533	93	507
539	86	500