PRICE LEVEL 200 180 160 140 120 100 80 60 40 20 0 0 1 AD Real GDP and Natural Real GDP LRAS 3 4 5 6 7 REAL GDP (Trillions of dollars) SRAS 2 8 9 10 The short-run equilibrium output level is $6 trillion . As a result, , and the economy is operating conomy. exists in the labor ma $8 trillion Step 2: Two PPFs $6 trillion Consider the following scenario: The eco $5 trillion ng-run equilibrium, as short-run equilibrium output is equal to the Natural Real GDP of $6 trillion. $7 trillion The following graph shows two production possibilities frontiers (PPFS) for the economy. The PPF closer to the origin (blue curve) is the economy's institutional PPF, and the PPF farther from the origin (purple curve) is the economy's physical PPF. Place the grey point (star symbol) on one of the black points (plus symbol) to indicate the state of the economy when it is operating at the short- run equilibrium described above. 10 00 ALL OTHER GOODS (Thousands of units) 7 CO 5 4 3 2 1 Physical PPF F Institutional PPF C + + E D B 0 1 2 3 4 5 6 7 GOOD X (Thousands of units) In time, wages and costs of production will likely 8 9 10 State of Economy , and the economy is operating As a result, omy. in a long-run equilibrium with an inflationary gap un equilibrium, as short-run equ with a recessionary gap the Natural Real GDP of $ (DDE The short-run equilibrium output level is $6 trillion a shortage a surplus tequilibrium St exists in the labor market of this econom PFs ollowing scenario: The economy is in long-run