AD/AS model. Country A is an oil exporting country. The aggregate demand and supply functions are given as below:AD : Y = 710 − 30P + 5G+3Poil AS : Y = 10 + 5P − 2Poilwhere Y is real GDP, P is the price level, G is the government purchases, and Poil is the world price of oil.Write down the equilibrium condition.Solve for the equilibrium value of real GDP and the price level (hint: take G and Poil as known variables).Draw the AD/AS graph to show when Poil rises in the world market, what will happen the AD and SAS curves. Explain the price level effect and the output effect due to the change of the oil price.

The question is based on the aggregate demand - aggregate supply model.

Answered: AD/AS model. Country A is an oil…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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AD/AS model.

Country A is an oil exporting country. The aggregate demand and supply functions are given as below:

AD : Y = 710 − 30P + 5G+3P_oil

AS : Y = 10 + 5P − 2P_oil

where Y is real GDP, P is the price level, G is the government purchases, and P_oil is the world price of oil.

Write down the equilibrium condition.
Solve for the equilibrium value of real GDP and the price level (hint: take G and P_oil as known variables).
Draw the AD/AS graph to show when P_oil rises in the world market, what will happen the AD and SAS curves. Explain the price level effect and the output effect due to the change of the oil price.

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