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Solving 2 Macro-economy Questions - Essay Example

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The problem used two different types of GDP, the nominal GDP and real GDP. Nominal GDP is also called the unadjusted GDP because it is based on the prevailing prices when the output was produced. Real GDP is the adjusted GDP. It is called as such because it is the measure of the market value of all final output that is deflated or inflated to reflect the changes in the price level. In order to know the real GDP, a price index is used to adjust the GDP by dividing the nominal GDP with the price index. When expressed in an equation, it is real GDP = nominal GDP/ GDP price index. The GDP price index is an index number showing how the weighted-average price of a “market basket” of goods changes over time. In our problem, the real GDP and price index were given and we are asked to compute for nominal GDP. For us to compute for the full employment level of nominal (GDP), we need to multiply the given real GDP ($1.2 trillion) by the price index of 115. This will give us the answer of $138 trillion as the full employment level of nominal GDP. For question number 2, aggregate demand and the spending on purchases on goods and services are studied. Aggregate demand is the relationship between the quantity of output demanded and the aggregate price level (Mankiw). It tells us the quantity of good and services people will buy at any given price. An increase in the price level corresponds to a movement up along the unchanged aggregate demand curve.

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Summary

In answering the first question, we need to define and understand the terms that are related with it. Aggregate supply is a schedule or curve that shows the total quantity of goods and services supplied or produced at different price levels (McConnell and Brue)…
Solving 2 Macro-economy Questions
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