The Short-Run Aggregate Supply Curve Is π = πE

question 16

Essay

The short-run aggregate supply curve is π = πe + 0.8 (Y - 20) + ρ. Suppose inflation last year was 5 percent, current output is 20, and there is a price shock of 2 percent. Suppose, further, that potential output rises next year to 21, while output remains at 20 and next year's price shock is zero. Calculate and explain next year's inflation.

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