Determine the level of real output in the long run

Question

Consider the full employment level of real output (Q) for a hypothetical economy will be $250 and the price level (P) at first is 100. Employ the short-run aggregate supply schedules below to answer the questions that follow:

Determine the level of real output in the long run while the price level increase from 100 to 125? While it falls from 100 to 75? Depict each situation.

Answer 1

$250; $250. In the long run, a rise in the price level to 125 leads to nominal wage increase. The AS(P100) schedule alter to AS(P125) and Q returns to $250, now at a price level of 125. In the long run, a reduction in price level to 75 leads to lower nominal wages, yielding aggregate supply schedule AS(P75). Equilibrium Q returns to $250, now at a price level of 75.