Question

Refer to the data in the table that accompanies problem 2. Suppose that the present equilibrium price level and level of real GDP are 100 and \(225, and that data set B represents the relevant aggregate supply schedule for the economy.

(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. What must be the current amount of real output demanded at the 100 price level?
2. If the amount of output demanded declined by \)25 at the 100 price level shown in B, what would be the new equilibrium real GDP? In business cycle terminology, what would economists call this change in real GDP?

Short answer

1. The real output demanded will be $225.

2. The new equilibrium is at $200 of real GDP. The change in real GDP is due to the recession.

Step-by-step solution

Amount of real output demanded

At equilibrium, the quantity supplied is equal to the quantity demanded.

Since the equilibrium is at 100 price level and $225 real GDP, the current real output demanded must be $225.

Change in equilibrium and technical terminology for the change

Since the output demanded falls by $25 at constant prices, the quantity supplied will also fall by $25.Thus, the new equilibrium will fall to $200 of real GDP.

The real output always declines in a recession. So, the decline in the real GDP will be referred to as the recession.