Discussion on Potential GDP with diagrams
1. Consider an economy which is above full-employment equilibrium (natural rate of output) due to an increase in AD. Prices of productive resources have not changed. With the help of a graph, discuss explain how the economy returns to long-run equilibrium, with no government intervention.
2. Consider an economy where economists have estimated which last yr's real GDP was $800 billion, equal to potential GDP. The price level was 105. Suppose which this yr the economist estimate which potential GDP has increased by 10 percent. Explain however, actual real GDP has decreased by 5 percent, while the price level has also decreased by 5 percent. Draw an AD-AS graph which Explain how last yr's equilibrium, as well as last yr's demand, aggregate supply (short-run also long-run), price level also real GDP level. Next, given the information above, Explain how Illustrate what has happened to the price level also the level of real GDP this yr( Explain how this yr's equilibrium), plus Illustrate what has happened to aggregate demand, short-run aggregate supply also long-run aggregate supply since last yr.