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The table shows several possible situations for the economy in terms of output gaps and the rate of change of wagen Real GDP is measured in billions of dollars
The table shows several possible situations for the economy in terms of output gaps and the rate of change of wagen Real GDP is measured in billions of dollars. Assume that potential output is $800 billion. Output Gap Shift of AS Curve Situation A B ? D E F G H ? Real GDP 775 785 795 800 805 815 825 835 Rate of Wage Change -2.0% -1.2% -0.2% 0.0% 1.0% 2.4% 4.0% 5.8% a Compute the output gap (YY) for each situntion. b. For each situation, explain whether the economy's AS curve is shifting up, shifting down, or stationary
Expert Solution
Output Gap = Actual Output - Potential Output
Potential Output = 800
| Situation | Real GDP | Output Gap | Rate of wage change | Shift of AS Curve |
| A | 775 | 775 - 800 = -25 | -2.0% | Downward |
| B | 785 | 785 - 800 = -15 | -1.2% | Downward |
| C | 795 | 795 - 800 = -5 | -0.2% | Downward |
| D | 800 | 800 - 800 = 0 | 0.0% | Stable |
| E | 805 | 805 - 805 = 5 | 1.0% | Upward |
| F | 815 | 815 - 800 = 15 | 2.4% | Upward |
| G | 825 | 825 - 800 = 25 | 4.0% | Upward |
| H | 835 | 835 - 800 = 35 | 5.8% | Upward |
During negative output gap, there is less production than potential and a fall in output. So there is downward shift of AS curve.
During positive output gap, there is more production than potential and a rise in output. So there is upward shift of AS curve.
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