Question

Between 1990 and 2009, the U.S. price level rose by about 64 percent while real output increased by about 62 percent. Use the aggregate demand–aggregate supply model to illustrate these outcomes graphically.

Short answer

The following figure illustrates a simultaneous rise in both price level and GDP level in the US economy.

Step-by-step solution

The short-run and long-run impact of rise in oil prices on the economy 

The AD-AS model establishes a relation between the price level and GDP level. Here, the US price level increases by 64 percent while real output increases by 62 percent. The increase in both price level and GDP level occurs due to the rightward shift of the aggregate demand curve.

The following figure illustrates the impact of the rightward shift in the aggregate demand curve on the US economy.

In the above figure, E_f is the long-run equilibrium point, P_f and Q_f are the initial price and GDP level, respectively. Due to an increase in demand, the AD₀ curve shifts rightwards to AD₁. As a result price level rises from P_f to P₁, and the actual GDP level rises from Q_f to Q_1. Thus, an inflationary impact is created in the US economy.