If the aggregate demand (ADI)curve in an economy is Y = 10,000 - 10,000
,current inflation ( )equals 0.05 (5%),and potential output (Y*)equals 9,700,then in the short run,equilibrium output equals ________ and,in the long run,the inflation rate equals ________%
A) 9,700;3
B) 9,700;5
C) 9,500;3
D) 9,500;5
E) 9,300;3

Question

If the aggregate demand (ADI)curve in an economy is Y = 10,000 - 10,000 
,current inflation (  )equals 0.05 (5%),and potential output (Y*)equals 9,700,then in the short run,equilibrium output equals ________ and,in the long run,the inflation rate equals ________%
A) 9,700;3 
B) 9,700;5 
C) 9,500;3 
D) 9,500;5 
E) 9,300;3

Quizplus · Accepted Answer

In the short run, equilibrium output is found where the ADI curve intersects the short-run aggregate supply (AS) curve. However, we are not given any information about the AS curve, so we cannot solve for short-run equilibrium output. Therefore, we must use the information provided to determine the long-run equilibrium output and inflation rate.

In the long run, output returns to potential output and the economy experiences a zero output gap. This means that at the long-run equilibrium, Y = Y*. So, we can set Y equal to 9,700 and solve for the equilibrium price level (P).

Y = ADI = 10,000 - 10,000P
9,700 = 10,000 - 10,000P
0.03 = P

So, in the long run, the inflation rate equals 3% (not 5%, the current inflation rate).

Therefore, the best choice is C: 9,500;3.

If the Aggregate Demand (ADI)curve in an Economy Is Y