Question

2. ADVANCED ANALYSIS Suppose that the equation for a par-

ticular short-run AS curve is P = 20 + 0.5Q, where P is the

price level and Q is real output in dollar terms. What is if the

price level is 120? Suppose that the Q in your answer is the full-

employment level of output. By how much will Q increase in

the short run if the price level unexpectedly rises from 120 to

132? By how much will Q increase in the long run due to the

price level increase? L018.1

Answer 1

Q = 200

ΔQ = 24

Q will return to the full-employment level of output defined above, Q= 200. Thus, the long-run change is zero.

Explanation:

If P = 120

⇒ 120 = 20 + 0.5Q

⇒ Q = 100/0.5 = 200 (It is the full- employment level of output)

If the price level unexpectedly rises from 120 to 132, Q will increase

132 = 20 + 0.5Q

⇒ 0.5Q = 112

⇒ Q = 224

ΔQ = 224 - 200 = 24

The change in Q is 24.

Q will not increase in the long run due to the price level increase,

Q will return to the full-employment level of output defined above, Q= 200. Thus, the long-run change is zero.