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

question 201

Essay

An aggregate-supply (AS)curve is described by the equation Y = YLR + a × (P - PEXP),where Y is current output,YLR is the long run level of output,a is a positive constant,P is the current price level,and PEXP is the expected price level.Suppose YLR = 50,a = 1,and PEXP = 40.
a. Draw the long-run aggregate-supply curve in an AD - AS (aggregate demand - aggregate supply) diagram.
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.
c. Identify the expected price level on your graph.
d. Suppose the expected price level decreases to PEXP = 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:

Hypothesis

An assumption that is tested through research and experimentation.

Original Hypothesis

The initial theory or assumption that is made at the beginning of a research or experimental process, proposing a potential outcome.

Adapt

The ability to change or adjust oneself or one's approach to meet different conditions or environments.

Terminate

To bring an end to something; in business, it can refer to the conclusion of a contract, the end of an employment relationship, or the cessation of operations.