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Question 5
Consider the following system of two equations:
AD: YAD =710 – 30P + 5G
AS: YAS = 10+ 5P – 2POIL
where Y is real GDP, P is the price level, G is the level of government expenditure, and POIL is the world price of oil.
5.1 Explain the various terms in the AD curve. What is the value of the multiplier?
5.2 Explain the various terms in the AS curve. Explain why the price of oil enters negatively.
5.3 Solve for the equilibrium value of real GDP and the price level.
