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Price level and real output

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1. State the final impact of cost-push inflation on the price-level and real output.

2. State the final impact of demand-pull inflation on the price-level and real output.

3. Identify the three Federal Reserve tools used to undertake an easy monetary policy.

4. Identify the three Federal Reserve tools used to undertake a tight monetary policy.

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1. As the costs of goods increase, demand would fall as people would find their incomes would not purchase as many goods. Companies would be forced to lay off workers. This combination of inflation and lower output is termed "stagflation" as was an issue in the 1970s and 1980s.

2. Demand pull inflation results when consumers purchasing goods beyond what the economy can easily produce. Bidding against each other, they drive up prices, while also encouraging a greater level of economic output. The economy settles at a higher price level, but also a higher output level.

3. The Federal Reserve uses open market operations, changes in the the reserve requirement, and changes in the ...

Solution Summary

Monetary policy, inflation, and real output.

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What is the new equilibrium price level and level of real output?

Suppose that the aggregate demand and aggregate supply schedules for a hypothetical economy are as shown:

Real GDP demanded Price level Real GDP supplied
100 300 450
200 250 400
300 200 300
400 150 200
500 100 100

a. use the above data to graph aggregate demand aggregate supply curves. What is the equilibrium price level and the equilibrium level of real output in this hypothetical economy? Is the equilibrium real output also necessarily the full- employment real output?

b. If the price level in this economy is 150, will quantity demand equal, exceed, or fall short
of quantity supplied? By what amount? If the price level is 250, will quantity demand equal, exceed, or fall short of quantity supplied? By what amount?

c.. Suppose that buyers desire to purchase $200 billion of extra real output at each price level. Sketch in the new aggregate demand curve as AD1. What is the new equilibrium price level and level of real output?

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