Assume that the accompanying graph depicts aggregate supply and demand conditions in an economy. Full employment occurs when$5 trillion of real output is produced. The economy is currently in equilibrium at point A.Price Level (average price)26024022020018016014012010001AAS₁2 3 4 5 6 7AD₁Real Output (in trillions of dollars per year)8ToolsEQInstructions: In parts a, b, and d, enter your responses as a whole number.a. What is the equilibrium rate of output?$trillion per yearb. How far short of full employment is the equilibrium rate of output?$trillionc. On the graph, illustrate a shift of aggregate demand that would change the equilibrium rate of output to $5 trillion.Instructions: Shift the aggregate demand curve (AD1) such that the equilibrium in the macro model is at $5 trillion. Then use the toolprovided 'EQ' to label the new equilibrium.d. What is the price level at this full-employment equilibrium?

Aggregate demand refers to the total demand for commodities and services made by all the economic participants over a particular time period.And aggregate supply implies the value of all the commodities and services provided in the economy by the producers.The product market equilibrium occurs where total demand meets total supply.The AD curve represents an economy's entire demand while the AS curve reflects the economy's total production.=> The market equilibrium occurs at the intersection of the AD and the AS function.=> The market equilibrium occurs corresponding to the price level 160And the market-clearing level of output can be found corresponding to this price level.=> The equilibrium rate of output is $4 trillion per year.As given, the full employment occurs when the output reaches $5 trillion per year=> The full employment level of output = $5 trillionHowever, the actual level of output = $4 trillion=> There is a negative GDP gap of $1 trillion=> The equilibrium level of output is $1 trillion short of full employment level.As explained above, the actual level of output is less than the potential output=> The economy is experiencing a negative economic gap of $1 trillion=> The economy must be pushed up to the potential level of outputNow, this can be done by shifting the AD curve to the right=> The govt should take expansionary policies to increase AD=> The AD curve must be shifted parallelly to the right to change the equilibrium level of output to the full employment level.The AD curve is shifted rightwards.Now, the new equilibrium occurs corresponding to the intersection of the new AD curve and the AS curveAt this level, the economy attains the full employment outputThe market price can be derived corresponding to this output=> The price level at the full employment output level is 180.Final answer:Therefore, it can be concluded that-a) The equilibrium rate of output is $4 trillion per year.b) The equilibrium level of output is $1 trillion short of full employment level.c) The AD curve must be shifted parallelly to the right to change the equilibrium level of output to the full employment level.d) The price level at the full employment output level is 180.

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Assume that the accompanying graph depicts aggregate supply and demand conditions in an economy. Full employment occurs when $5 trillion of real output is produced. The economy is currently in equilibrium at point A. rice Level (average price) 260 240 220 200 180 160 140 A AS, Tools EQ

Assume that the accompanying graph depicts aggregate supply and demand conditions in an economy. Full employment occurs when $5 trillion of real output is produced. The economy is currently in equilibrium at point A. rice Level (average price) 260 240 220 200 180 160 140 A AS, Tools EQ

ENGR.ECONOMIC ANALYSIS

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Chapter1: Making Economics Decisions

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Question

Assume that the accompanying graph depicts aggregate supply and demand conditions in an economy. Full employment occurs when
$5 trillion of real output is produced. The economy is currently in equilibrium at point A.
Price Level (average price)
260
240
220
200
180
160
140
120
100
0
1
A
AS₁
2 3 4 5 6 7
AD₁
Real Output (in trillions of dollars per year)
8
Tools
EQ
Instructions: In parts a, b, and d, enter your responses as a whole number.
a. What is the equilibrium rate of output?
$
trillion per year
b. How far short of full employment is the equilibrium rate of output?
$
trillion
c. On the graph, illustrate a shift of aggregate demand that would change the equilibrium rate of output to $5 trillion.
Instructions: Shift the aggregate demand curve (AD1) such that the equilibrium in the macro model is at $5 trillion. Then use the tool
provided 'EQ' to label the new equilibrium.
d. What is the price level at this full-employment equilibrium?

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Step 1: Define AD-AS equilibrium

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Step 2: Find Equilibrium point

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Step 3: Explain the Deviation from full employment

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Step 4: Explain the Shift of AD

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Step 5: Find New price

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Suppose that the production function for the economy is given by: Y = AL/3K/3 Suppose that this economy has 1,000 units of Labour, and 125 units of capital, and TFP (A) is equal to 10. The Short-Run Aggregate Supply Curve (AS) here is given by: Y = 5p And when we consider the AEF at a price level of $1,400, the main components of it (C, I, & G) are given by (we are assuming a closed economy NX = 0): C = 300 + 0.8Y I = 300 G = 200 1. What is potential GDP in this question (Y*)? Show your work. Suppose also that for any $10 decrease in price, desired consumption will increase by $5. 2. Write down the equation for the Aggregate Demand Curve (AD) in the form of Y = a + bp. Show your work. 3. What is the current Short-Run Equilibrium value for Real GDP (Y) and the price level (p)? Show your work. 4. Draw the AD, AS, and LRAS curves. Label all x-intercepts and y-intercepts. Are we currently in an Inflationary Gap, Recessionary Gap, or in Long-Run Equilibrium? How do you know?
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