Question

(a) as(p100) (b) as(p125) (c) as(p75) p q p q p q 125 $ 560 125 $ 500 125 $ 620 100 500 100 440 100 560 75 440 75 380 75 500 suppose the full employment level of real output (q) for a hypothetical economy is $500, the price level (p) initially is 100, and prices and wages are flexible both upward and downward. refer to the accompanying short-run aggregate supply schedules. in the long run, a fall in the price level from 100 to 75 will

Answer 1

Consider a hypothetical economy where the initial price level (P) is 100 and the level of real output (Q) at full employment is $250.

What occurs if, due to a decline in aggregate demand, the price level unexpectedly drops from 100 to 75?

Again, in accordance with schedule AS(P125), the real production falls from $250 to $ 220 if the price level unexpectedly drops from $100 to $75 due to a decline in aggregate demand. As a result, it is seen that the output level changes along with changes in the price level.

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