Period : 1 2 3 4 5 6 Technology shock: -400 -80 0 1,000 400 0 A. Calculate the p
ID: 1179472 • Letter: P
Question
Period: 1 2 3 4 5 6
Technology shock: -400 -80 0 1,000 400 0
A. Calculate the points on the aggregate demand curve when the price level equals 0.75, 0.80, 1.00, 1.20, 1.25, and 1.50.
B. Compute the price level and real GDP in periods 1-6. Describe the cyclical behavior of real GDP and the price level in this real business cycle model.
Explanation / Answer
A)
If the price level equals 0.75, the point on the aggregate demand curve is
1. Y = 7,000 + 2,400/p
= 7,000 + 2,400/ 0.75 = 10,200.
2. For p = 0.80
Y = 7,000 + 2,400/ 0.80 = 10,000
3. For p = 1.00
Y = 7,000 + 2,400/ 1.00 = 9,400
4. For p = 1.20
Y = 7,000 + 2,400/ 1.20 = 9,000
5.For p = 1.25
Y = 7,000 + 2,400/ 1.25 = 8,920
6.For p = 1.50
Y = 7,000 + 2,400/ 1.50 = 8,600
we get the following points are on the aggregate demand curve:
1. (10,200, 0.75),
2. (10,000, 0.80),
3.(9,400, 1.00),
4.(9,000, 1.20),
5. (8,920, 1.25),
6. (8,600, 1.50).
b.
The aggregate supply curve is vertical at natural real GDP in a real business cycle model.Therefore, in any period, real GDP equals natural real GDP, and the price level is where the vertical aggregate supply curve intersects the aggregate demand curve. In period one, the technology shock equals 400, so that natural real GDP and real GDP equal 8,600. The price level in period one equals 1.50. In period two, the technology shock equals 80, so that natural real GDP and real GDP equal 8,920. The price level in period two equals 1.25. In period three, the technology shock equals 0, so that natural real GDP and real GDP equal 9,000. The price level in period three equals 1.20. In period four, the technology shock equals 1,000, so that natural real GDP and real GDP equal 10,000. The price level in period four equals 0.80. In period five, the technology shock equals 400, so that natural real GDP and real GDP equal 9,400. The price level in period five equals 1.00. In period six, the technology shock equals 0, so that natural real GDP and real GDP equal 9,000. The price level in period six equals 1.20. Real GDP rises from period one through period four as technology shocks become larger. The price level falls over that same time. Then, real GDP declines in the last two periods as the size of the technology shocks decrease. The price level rises during periods five and six.