An Aggregate-Supply (AS) Curve Is Described by the Equation Y

question 240

Essay

An aggregate-supply (AS) curve is described by the equation Y = Y_LR + a × (P - P_EXP), where Y is current output, Y_LR is the long run level of output, a is a positive constant, P is the current price level, and P_EXP is the expected price level. Suppose Y_LR = 50, a = 1, and P_EXP = 40.
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a. Draw the long-run aggregate-supply curve in an AD - AS (aggregate demand - aggregate supply) diagram.
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b. Using the AS equation, find the output corresponding to price levels P = 40 and P = 80 and place the 2 points on your diagram. Draw the short-run AS curve that passes through the two points.
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c. Identify the expected price level on your graph.
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d. Suppose the expected price level decreases to P_EXP = 30. For current price levels P = 40 and P = 60, recalculate the output levels using the AS formula. Draw the new AS curve and identify the new expected price level.

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Definitions:

Minimum Reservation Point

is the lowest or least favorable outcome one is willing to accept in a negotiation or deal.

Maximum Reservation Point

The highest price a consumer is willing to pay for a good or service, beyond which they will choose not to purchase it.

Reservation Point

The least favorable point at which one will accept a deal during negotiations, beyond which they will walk away.

Bargaining Zone

A range within which an agreement is satisfactory to both parties involved in a negotiation process.