Question

If short-run aggregate supply is given by the equation P = 2 + Y, and aggregate demand is given by P = 3 - Y, with the long-run aggregate supply (LRAS) as Y = 3/4, calculate the equilibrium level of output and price. Explain the implications of this equilibrium on the economy.

Answer 1

The equilibrium level of output and price can be calculated by finding the point where the aggregate demand (AD) curve intersects the short-run aggregate supply (SRAS) curve. In this case, the equilibrium level of output is Y = 1 and the equilibrium price is P = 2. The implications of this equilibrium on the economy depend on the context and could indicate stability or the need for expansionary policies.

Step-by-step explanation:

The equilibrium level of output and price can be calculated by finding the point where the aggregate demand (AD) curve intersects the short-run aggregate supply (SRAS) curve. In this case, the AD curve is given by the equation P = 3 - Y, and the SRAS curve is given by P = 2 + Y.

Setting the two equations equal to each other, we have 3 - Y = 2 + Y. Solving for Y, we get Y = 1.

Substituting this value back into either equation, we find that the equilibrium price is P = 3 - 1 = 2.

The implications of this equilibrium on the economy can differ depending on the context. In general, an equilibrium level of output and price represents a balance between aggregate demand and supply. If the economy is at full employment, the equilibrium could indicate stability. However, if the economy is below full employment, there may be room for expansionary policies to increase output and decrease unemployment.