Suppose the Relationship Between Real GDP and Inflation Is Depicted

Essay

Suppose the relationship between real GDP and inflation is depicted as shown in the table below. Assume that real and potential GDP are equal to each other at $5,400 billion. Suppose government purchases decline by $100 billion and the slope of the aggregate expenditure line is 0.5. $$\begin{array} { | c | c | c | c | c | c | } \hline \text { Inflation } & 9 & 7 & 5 & 3 & 1 \\\hline \text { Real GDP } & 5,200 & 5,300 & 5,400 & 5,500 & 5,600 \\\hline\end{array}$$ (A) Esplan how the $A D$ curve is affected by this change. In the shart run, what will real GDP and the rate of inflation be?
(B) Using the $A D$ and $L A$ curves, show what will heppen in the mediun run Be sure to grive an economic exalanation far what is happening
(C) Using the $A D$ and $L A$ curves, show what will happen in the lang run.