Consider an economy currently in recession. Assume that the full-employment equi

Question

Consider an economy currently in recession. Assume that the full-employment equilibrium is at $600 billion of real GDP, and assume that in order for the economy to be at full employment, there needs to be an increase in aggregate demand. 10.2. Government policies can be developed to work against the problems of unemployment and inflation because government can A. increase aggregate demand to combat unemployment and decrease aggregate demand to combat inflation B. increase aggregate supply to combat unemployment and decrease aggregate demand to combat inflation C. decrease aggregate demand to combat unemployment and increase aggregate demand to combat inflation D. increase aggregate demand to combat unemployment and increase aggregate demand to combat inflation

Explanation / Answer

To reach the full-employment income of $600 billion, the aggregate demand (AD) curve must shift to the right so that the level of equilibrium real GDP increases by $100 billion. Equilibrium real GDP increases from $500 billion to $600 billion, and the price level increases from 120 to 150, which is the lowest possible price level at full employment. So, you should have placed a line through the points (600, 150), the full-employment equilibrium, and (800, 120). for all the additional info: https://netfiles.uiuc.edu/sogo/ApliaCh8.html

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