Question: Suppose the aggregate demand and short-run aggregate supply schedules for an economy whose potential output equals $2,700 are given by the table.

Aggregate Quantity of Goods and Services Price Level Demanded Supplied-

0.50 $3,500 $1,000 0.75 3,000 2,000 1.00 2,500 2,500 1.25 2,000 2,700 1.50 1,500 2,800

Draw the aggregate demand, short-run aggregate supply, and long-run aggregate supply curves. State the short-run equilibrium level of real GDP and the price level.

Characterize the current economic situation. Is there an inflationary or a recessionary gap?

If so, how large is it?

Now suppose aggregate demand increases by $700 at each price level; for example, the aggregate quantity of goods and services demanded at a price level of 0.50 now equals $4,200. Show the new aggregate demand curve, state the new short-run equilibrium price level and real GDP, and state whether there is an inflationary or a recessionary gap and give its size.