Real aggregate expenditure, AE (trillions of dollars) Y AE AE, AE, 45 Real GDP, Y (trillions of dollars) Refer to Figure 12-2. Suppose that the level of GDP associated wkh point K is potential GDP. If the U.S. economy is currently at point N, then O the level of unemployment is above the natural rate. O the economy is at full employment. O firms are operating below capacity. the economy is in an expansion.

In the first quarter of 2020, US real GDP declined about 9%, due to the economics shocks from the Covid 19 virus. If prices were completely flexible, and this means all prices, both inputs (such as labor), as well as output prices, what would you think would have been the drop in GDP? If prices are completely fixed, would the drop in GDP be greater or less than the flexible case? Why? If the Expenditure method of accounting for GDP, has to equal the Income Side, and the economy overproduces a particular item, say automobiles, the income side will also be higher, workers will buy the extra cars with extra income and the economy can gyrate indefinitely higher? Why or why not?

40 AD3 38 - AS 36 - AD 2 34 - 32- AD, 30 - 28 - 26 24 - 22 - 20 4 10 12 14 16 18 20 Real Output (quantity in billions per year) Suppose the economy is at full employment when AD = AD3. a. The GDP gap when the demand curve is at AD1 is billion b. The shortfall when the demand curve is at AD1 is billion Price Level (average price)

What is the contractionary phase of the business cycle characterized by? O reduced output and increased unemployment increased output and increased unemployment reduced output and reduced unemployment increased output and reduced unemployment

The macroeconomy is depicted by the graph to the right 160- a. The current equilibrium price level and output level respectively are: 80 and $ 10 trillion. (Enter your responses as a whole numbers.) LRAS 140- b. The full employment level of GDP is SRAS O A. $10 trillion since the LRAS is defined at this point. 120- O B. unknown since no information was provided about the labor market. 100- O C. $10 trillion now but thereafter it depends on what the aggregate demand curve does. O D. $10 trillion now but it depends on the SRAS curve. 80- 60- AD 40- 10 12 14 16 18 20 Real GDP ($ trillions) Price level

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Refer to the figure below. Which of the points in the above graph are possible short-run equilibria? Price level (GDP deflator, 2000 = 100) O A and B O A and C O A and D O A, B, C, and D LRAS SRAS, SRAS₂ AD₂ AD₁ Real GDP (trillions of 2000 dollars)