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

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.