Suppose the aggregate demand and supply schedules for a hypo

Suppose the aggregate demand and supply schedules for a hypothetical economy are as show below: What will be the equilibrium price and output level in this hypothetical economy? Is it also the full-employment level of output? Explain. Why won\'t the 200 index be the equilibrium price level? Why won\'t the 300 index be the equilibrium price level? Suppose demand increases by dollar 120 billion at each price level. What will be the new equilibrium price and output levels?

Solution

a)

The equilibrium level in the economy is achieved at the point real demand equals real supply of output.

As it can be seen from the given data, this is achieved where Real DD = Real DD = 180 billion and P = $250

Yes, this is also the full employment level of output.

b)

The price index of 200 will not be the equilibrium price level because at this point real output demanded (240 billion) exceeds real output supplied (120 billion), thereby creating a situation of shortage in the economy.

Similarly, the price index of 300 will not be the equilibrium price level because at this point real output demanded (120 billion) is less than real output supplied (240 billion), thereby creating a situation of surplus in the economy.

c)

Increasing demand by 120 billion at each level, the new equilibrium will be achieved where Real DD = Real DD = 240 billion and P = $300