Question

Suppose that the long-run aggregate supply curve is positioned at a real GDP level of $\$18$trillion in base-year dollars, and the long-run equilibrium price level (in index number form) is 115 . What is the full-employment level of nominal GDP?

Short answer

As a conclusion, the nominal GDP rate of full employment in the economy is $\$20.7trillion$.

Step-by-step solution

Aggregate demand curve.

When the demand and supply curves in the economy intersect, the economy is said to be in equilibrium. When the aggregate demand curve (AD) and the long run supply curve (LRAS) cross, this condition of equilibrium is reached.

Equilibrium with the LRAS.

The status of the long run equilibrium with the LRAS and the AD curve is depicted in the diagram below, along with the price and real GDP numbers.

The $x$axis in the above graph represents the economy's real GDP level, while the $x$axis represents the current price levels. The price level is $115$dollars and the total real expenditure is $18$trillion dollars in the long run equilibrium.

Step 3:  Real GDP.

The real GDP in the base year, as well as the price level, are required to compute the nominal GDP in the economy. The following is a calculation for the same:

$NominalGDP=\$18trillion\times \left(\frac{115}{100}\right)$

$=\$20.7trillion$