Economics

Suppose that, in the year 2013, when contracts were made, the price level (GDP deflator) was 100 but

everyone anticipated that the GDP deflator would be 130 in the year 2016. Here are the AgD and (short-run)

AgS schedules for 2016.

AgD and AgS are in trillions of constant dollars.

GDP Deflator    AgD    AgS
60    9    2
90    8    3
130    7    4
140    5    5
160    2    9

a. Draw the AgD and AgS curves. Label the curves with the appropriate price level. Label the axes.

b. What is equilibrium price (GDP deflator) and equilibrium GDP in 2016? Explain your answer. (Note: This is

short-run equilibrium.)

c. Is the equilibrium price level good or bad for business (suppliers of GDP) compared to the anticipated

price level? Explain your answer. (Hint: Work with the numbers for the equilibrium price and anticipated

price?

d. Why would this level of GDP not also apply in the long run? Explain thoroughly.

e. Revise the above table in a sensible way such that short-run equilibrium GDP (the correct answer in b)

would also apply to the long run. Explain why your revision makes that happen.

Reminder: GDP deflator is the price level for GDP, and GDP means real GDP.

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