131) What does the term aggregate supply mean?

132) What factors can cause an increase in aggregate supply?

133) Explain the three types of macroeconomic equilibrium.

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134) Demonstrate graphically and explain a recessionary gap. Describe two solutions for
closing the gap. The diagram of the gap:

The explanation of the gap diagram:

The diagram above shows a recessionary gap of (YFE-Y1). The economy is in equilibrium at
point A with price level P1 and real output level Y1. A recessionary gap exists when equilibrium
output is below potential output as it is in the diagram.

135) Demonstrate graphically and explain the case of an inflationary gap. Describe the forces
in the economy that will result in the gap closing itself.

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136) Indicate whether each of the following factors will affect aggregate demand (AD) or
aggregate supply (AS) and whether the effect would be an increase or a decrease. Then indicate
what will happen to the price level and the level of Real GDP and what type of equilibrium will
result assuming that the economy is initially in a long-run equilibrium.

a) A decrease in the nominal wage rate.

b) A decrease in exports.
c) A decrease in the exchange rate.
d) The discovery of vast new oil field in Northern B.C.
e) An increase in government spending.

137) Suppose that the economy of Umbria is initially at full-employment equilibrium. Explain,
in terms of shifts in AD or AS, how the following results could occur:

a) Real GDP increases; the price level decreases; the economy is experiencing an inflationary
gap.
b) Real GDP increases; the price level increases; the economy is experiencing an inflationary
gap.
c) Real GDP increases; the price level decreases; the economy is experiencing a recessionary
gap.
d) Real GDP decreases; the price level increases; the economy is experiencing a recessionary
gap.
e) Real GDP decreases; the price level increases; the economy is experiencing an inflationary
gap.

138) Assume that the Potential GDP in the economy of Peruggia is $750 and that the
aggregate demand and aggregate supply are as shown below:
Aggregate Quantity Demanded Price Index Aggregate Quantity Supplied
830 106 640

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 810 107 650
790 108 670
770 109 700
750 110 750
730 111 790
710 112 840
690 113 900

a) What is the value of equilibrium GDP and the price level? What type of macroeconomic
equilibrium exists?
b) Suppose that a serious firestorm hits parts of the country reducing its aggregate supply by
$130. What will be the new values of equilibrium GDP and the price level?
c) What type of gap now exists and what is its size.

139) Assume that the nominal wage rate increases from $16.50 to $18.40 and, at the same
time, the price index increases from 110 to 115. By how much has the real wage rate changed?

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140) The following figure depicts the economy of Atlas, which is presently in equilibrium.

a) What is the size of its recessionary gap?

b) What is the size of its gap as a percentage of its actual GDP?
c) If the natural rate of unemployment is 5 percent, using Okun's Law, calculate the amount of
unemployment in Atlas.

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