Suppose the full-employment level of real output (Q) for a hypothetical economy is and the price level (P) initially is 100. Use the short-run aggregate supply schedules below to answer the questions that follow: AS (P-100) AS (P-125) AS(P-75)
P Q P Q P Q
125 280 125 250 125 310
100 250 100 220 100 280
75 220 75 190 75 250
a. What will be the level of real output in the short run if the price level unexpectedly rises from 100 to 125 because of an increase in aggregate demand? What if the price level unexpectedly falls from 100 to 75 because of a decrease in aggregate demand? Explain each situation, using numbers from the table.
b. What will be the level of real output in the long run when the price level rises from 100 to 125 ? When it falls from 100 to 75 ? Explain each situation.
c. Show the circumstances described in parts and on graph paper, and derive the long-run aggregate supply curve.