Reference no: EM13977063

Macroeconomic equilibrium and the multiplier effect The following graph shows a hypothetical economy in short-run equilibrium at an output level of $400 billion and a price level of 100. Suppose that potential GDP in this economy is $200 billion. Use the grey line (star symbol) to plot the long-run aggregate supply (LRAS) curve on the graph. Use the grey line (star symbol) to plot the long-run aggregate supply (LRAS) curve on the graph. AD AS Potential GDP 0 100 200 300 400 500 600 700 800 200 175 150 125 100 75 50 25 0 PRICE LEVEL REAL GDP (Billions of dollars) AD AS Based on the graph, this economy is experiencing. The size of the of the gap is $ billion. Shift the aggregate demand (AD) curve to illustrate how potential output in this economy can be restored. To eliminate the GDP gap in this economy, the aggregate demand curve must shift to the by $ billion at each price level. Suppose that each $100 increase in disposable income causes consumption spending in the economy to rise by $75. The economy's marginal propensity to consume (MPC) is , which means that the oversimplified multiplier for this economy is and the shift in the aggregate demand curve required to restore the potential GDP level would occur if investment spending by