Describing potential gdp with diagrams

Reference no: EM1311467

1. Consider an economy that is above full-employment equilibrium (natural rate of output) due to an increase in AD. Prices of productive resources have not changed. With the help of a graph, discuss how the economy returns to long-run equilibrium, with no government intervention.

2. Consider an economy where economists have estimated that last year's real GDP was $800 billion, equal to potential GDP. The price level was 105. Suppose that this year the economist estimate that potential GDP has increased by 10 percent. However, actual real GDP has decreased by 5 percent, while the price level has also decreased by 5 percent. Draw an AD-AS graph that shows last year's equilibrium, as well as last year's demand, aggregate supply (short-run and long-run), price level, and real GDP level. Next, given the information above, show what has happened to the price level and the level of real GDP this year( show this year's equilibrium), plus what has happened to aggregate demand, short-run aggregate supply, and long-run aggregate supply since last year.

Reference no: EM1311467

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