This is a challenging question and involves algebraically solving the system of two equations given by AD abd AS curves. The equations for the curves are given by the following:
AD: YAD = 710-30P + 5G
AS: YAS = 10+5P-2Poil
where Y is real GDP, P is the price level, G is the level of government purchases and Poil is the world price of oil.
a) Explain the various terms in the AD curve. What is the value of the simple multiplier? (Hint: the simple multiplier is the change in equilibrium real GDP when some autonomous component of expenditure, like G, changes by $1 if the price level is held constant.)
b) Explain the various terms in the AS curve. Explain why the price of oil enters negatively.
c) Solve for the equilibrium value of real GDP and the price level.
d) Using your solution to part (c), what is the effect of change in G on equilibrium Y and P?
e) Using your solution to part (c), what is the effect of a change in Poil on equilibrium Y and P? hide problem
The supply curve is examined.