Suppose the aggregate demand and short-run aggregate supply schedules for an economy whose potential output equals $570 are summarized in the table below. Email.
|
Aggregate quantity of goods and services
|
|
Price Level
|
AD
|
AS
|
|
100
|
700
|
200
|
|
120
|
600
|
325
|
|
140
|
500
|
500
|
|
160
|
400
|
570
|
|
180
|
300
|
620
|
Where is short-run equilibrium?
Characterize the current economic situation. Is there an inflationary or a recessionary gap?
How large is it?
Imagine that consumers begin to lose confidence about the state of the economy, and so AD becomes lower by 275 at every price level. Identify the new aggregate equilibrium [e.g. at price level 100, AD will be 425 (700-275), etc.]. Is there an inflationary or a recessionary gap? How large is it? What is the impact of the loss of confidence on the economy?