Determine the level of real output in the short run

Question

Assume 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 short run if the price level unexpectedly increase from 100 to 125 due to an increase in aggregate demand? What if the price level drops unexpectedly from 100 to 75 due to a decrease in aggregate demand? Describe each circumstance, using numbers from the table.

 

Answer 1

$280; $220. While the price level increase from 100 to 125 [in aggregate supply schedule AS(P100)], producers experience higher prices for their products. Since nominal wages are constant, profits increase and producers raise output to Q = $280. Whereas the price level drop from 100 to 75, profits decline and producers adjust their output to Q = $75. These are short-run responses to changes into the price level.