The table below shows aggregate demand (AD) and aggregate supply (AS) at different levels of real GDP.

Real GDP (billions)

Aggregate Demand (billions)

Aggregate Supply (billions)

800

900

700

900

880

880

1000

920

960

1100

860

1040

Currently equilibrium is where AD = AS at $900 billion. Suppose aggregate demand increases by $40 billion at every level of GDP.

What will be the new equilibrium level of real GDP?

Question

The table below shows aggregate demand (AD) and aggregate supply (AS) at different levels of real GDP.

Real GDP (billions)

Aggregate Demand (billions)

Aggregate Supply (billions)

800

900

700

900

880

1000

920

960

1100

860

1040

Currently equilibrium is where AD = AS at $900 billion. Suppose aggregate demand increases by $40 billion at every level of GDP.

What will be the new equilibrium level of real GDP?

BlackTom AI · Accepted Answer

To tackle this question, I first restate the given data to keep the relationships clear. The table shows AD and AS at four GDP levels: 800, 900, 1000, and 1100 (all in billions). At these levels, AD values are 900, 880, 920, and 860 respectively, while AS values are 700, 880, 960, and 1040 respectively. The initial equilibrium occurs where AD = AS, which is at a real GDP of 900 billion.

Next, we are told that aggregate demand shifts upward by 40 billion at every GDP level. This means we add 40 to each AD value while AS remains unchanged. So the new AD schedule becomes: at 800 GDP -> 940, at 900 GDP -> 920, at 1000 GDP -> 960, at 1100 GDP -> 900.

Now we compare the new AD values to the fixed AS values to find the new equilibrium where AD = AS. Comparing row by row:
- At GDP 800, AD = 940 while AS = 700; these are not equal.
- At GDP 900, AD = 920 while AS = 880; these are not equal.
- At GDP 1000, AD = 960 and AS = 960; these are equal, indicating equilibrium.
- At GDP 1100, AD = 900 while AS = 1040; these are not equal.

Since the equality occurs at 1000 billion in real GDP, the new equilibrium output corresponds to that level. The correct interpretation is that the economy moves to a higher level of real GDP where the new aggregate demand matches the existing aggregate supply. The answer aligns with the option that represents $1000 billion in real GDP.

Note: If you were unsure about the original equilibrium, recall that the initial balance existed at 900 billion, where AD and AS both equal 880. The upward shift in AD by 40 shifts the intersection point to the GDP level where the new AD equals the AS at 960, which occurs precisely at the 1000 billion mark. This demonstrates how an aggregate demand increase can shift equilibrium output upward when the aggregate supply at the new level remains constant.

ECON 2002.01 AU2025 (21333) Midterm Exam 3 - Requires Respondus LockDown Browser

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