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

question 43

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 _PEXP = 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:

Zero-Coupon Bond

A bond that does not pay periodic interest and is sold at a deep discount from its face value.

Market Yield

The annual income return as a percentage of the market price of an investment.

Zero-Coupon Bond

A type of bond that does not pay interest during its life but is sold at a deep discount, providing profit at maturity when it is redeemed for its face value.

Matures

The point at which a financial instrument, such as a bond or loan, reaches its due date and the principal is to be paid back.