Question

Answer the following questions on the basis of the following three sets of data for the country of North Vaudeville:

(A)		(B)		(C)
Price Level	Real GDP	Price Level	Real GDP	Price Level	Real GDP
110	275	100	200	110	225
100	250	100	225	100	225
95	225	100	250	95	225
90	200	100	275	90	225

1. Which set of data illustrates aggregate supply in the immediate short-run in North Vaudeville? The short-run? The long run?

2. Assuming no change in hours of work, if real output per hour of work increases by 10 percent, what will be the new levels of real GDP in the right column of A? Do the new data reflect an increase in aggregate supply or do they indicate a decrease in aggregate supply?

Short answer

a. Data set B shows immediate short-run aggregate supply. Data set A shows short-run aggregate supply while the long-run aggregate supply is reflected through data set C.

b. The new levels of real GDP are as follows:

(A)
Price Level	Real GDP
110	302.5
100	275
95	247.5
90	220

The change in real GDP shows an increase in aggregate supply.

Step-by-step solution

Type of aggregate supply in different sets of data

The following are the reasons:

• In the immediate short-run, the price level (output price) remains constant.Thus, data set B represents immediate short-run aggregate supply in North Vaudeville.

• In the short run, the real GDP increases with the price level (output price).Therefore, data set A shows the short-run aggregate supply.

• The real GDP or output does not increase in the long run; only the price level increase. Hence, data set C depicts the long-run aggregate supply.

Change in real output and shift in the AS curve

Let the real output be O. If O increases by 10%, that is, 0.1O, the new output will be as follows:

New Output = O + 0.1O

New Output = 1.1O

Thus, to obtain the new levels of real GDP at each price level in column A, multiply the given real GDP by 1.1. The change in the real GDP is given in the table below.

(A)
Price Level	Real GDP
110	302.5 ( = 275 × 1.1)
100	275 ( = 250 × 1.1)
95	247.5 ( = 225 × 1.1)
90	220 ( = 200 × 1.1)

The new data represents an increase in aggregate supply because real GDP has increased at each price level.