Long free-response question, 10 pointsAbout 25 minutes · 10 points
The economy of Ardel is in a recession. Real GDP is 900 billion ardos (the ardo is Ardel's currency), and full-employment real GDP is 1,000 billion ardos. The marginal propensity to consume is 0.8. Ardel's banking system has limited reserves, and the ardo floats freely against other currencies. Assume the price level is constant for the calculations in part B.
Build the graph
Graph: AD-AS. Vertical axis: price level (PL). Horizontal axis: real GDP (real output, Y). Curves: AD (downward sloping), SRAS (upward sloping), LRAS (vertical at full-employment output (Yf)). The starting equilibrium is where AD and SRAS cross, at Y₁ and PL₁, both marked on the axes. Y₁ is on LRAS, at full-employment output Yf.
Graph: AD-AS. Vertical axis: price level (PL). Horizontal axis: real GDP (real output, Y). Curves: AD (downward sloping), SRAS (upward sloping), LRAS (vertical at full-employment output (Yf)). The starting equilibrium is where AD and SRAS cross, at Y₁ and PL₁, both marked on the axes. Y₁ is on LRAS, at full-employment output Yf.
Build the graph
Graph: AD-AS. Vertical axis: price level (PL). Horizontal axis: real GDP (real output, Y). Curves: AD (downward sloping), SRAS (upward sloping), LRAS (vertical at full-employment output (Yf)). The starting equilibrium is where AD and SRAS cross, at Y₁ and PL₁, both marked on the axes. Y₁ is on LRAS, at full-employment output Yf.
Graph: AD-AS. Vertical axis: price level (PL). Horizontal axis: real GDP (real output, Y). Curves: AD (downward sloping), SRAS (upward sloping), LRAS (vertical at full-employment output (Yf)). The starting equilibrium is where AD and SRAS cross, at Y₁ and PL₁, both marked on the axes. Y₁ is on LRAS, at full-employment output Yf.