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

question 115

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.
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 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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