Question

At the current price level, producers supply \(375 billion of final goods and services while consumers purchase \)355 billion of final goods and services. The price level is:

1. above equilibrium.
2. at equilibrium.
3. below equilibrium.
4. more information is needed.

Short answer

Option (a) above equilibrium

Step-by-step solution

Concept of economy’s equilibrium

Aggregate demand (AD) is the price level that buyers are collectively willing to pay at different income or output levels. In other words, it is the price level that the suppliers expect at each income or output level.

In contrast, the aggregate supply (AS) curveis a schedule or curve showing the relationship between a nation’s price level and the amount of real domestic output that firms in the economy produce.

Equilibrium is when the AS and AD curves intersect.

Explanation for the answer

As given in the question, the aggregate demand is $355 billion while the aggregate supply has exceeded the demand by $20 billion.A larger aggregate supply indicates the price level has reached beyond the equilibrium level at which the consumers are not willing to buy the output produced.

The overproduced output will not be consumed because the price level is beyond the equilibrium. Therefore, the price will drop until the equilibrium level, where the aggregate supply will match the aggregate demand.