Question

1. In an ADAS model, Real GDP is always equal to potential GDP. True or false?

2. The JFK International Airport is building its 3^rd runway now. Use the ADAS model to explain the short-run impact on the HK economy.

Answer 1

1) False. Real GDP and potential GDP can differ in short run when AD and AS may not necessarily intersect at LRAS. Hence, in long run, Real GDP and potential GDP are always equal but in short run Real GDP and potential GDP may not be equal

2) In HK economy, this is likely to increase in domestic travel to the US and US travel to HK. This is likely to boost international trade and so net exports may increase. Hence, AD would shift right and real GDP and price level would rise in the HK economy

AS Price level G* G1 Real output