This Exercise Uses an Aggregate-Supply Curve and a Production Function

Essay

This exercise uses an aggregate-supply curve and a production function to construct the corresponding Phillips curve.Its purpose is to better understand the assumptions behind the short-run Phillips curve.Suppose the aggregate production function of an economy is Y=L,where Y is output and L is labour (employment).Unemployment is U=LF-L,and the unemployment rate is u = U/LF.We also need to assume that the labour force (LF)is constant,such that an increase in the number of employed people (DL)corresponds to an equal decrease in the number of unemployed (-DU).Let us assume a very simple-short run aggregate supply curve,Y=P.Question: For the price levels P equal 100,105,and 115,find two inflation-unemployment points in a Phillips curve diagram.Consider LF=120.