Question

Suppose the economy is self-regulating, the price level is 132, the quantity demanded of Real GDP is $4 trillion, the quantity supplied of Real GDP in the short run is $3.9 trillion, and that the quantity supplied of Real GDP in the long run is $4.3 trillion. Is the economy in short-run equilibrium? Will the price level in long-run equilibrium be greater than, less than, or equal to 132? Explain your answers

Answer 1

Given that price level is $132

Real GDP $4 trillion natural

$3.9 trillion in short run,

$4.3 trillion long run. Naturally an economy can be either at equilibrium when the real GDP=Natural GDP, At inflationary when real GDP is greater than natural GDP and at Recession when real GDP is less than Natural GDP.

The economy is in disequilibrium because the natural GDP in the economy is not equal to real GDP in the short run. Therefore, it will result to recession in the economy.

The price in the long run equilibrium will be greater than $132 because, the real GDP in the long run is greater than $4.0 trillion. The latter will result in inflation due to existence of surplus in the economy. Inflation results to high prices more than $132 to compensate for the inflation rate