Suppose the economy's short-run aggregate supply (AS) curve is given by the following equation: Quantity of Output Supplied = Natural Level of Output + a x (Price LevelActuat Price LevelExpecte The Greek letter a represents a number that determines how much output responds to unexpected changes in the price level. In this case, assume that a = $2 billion. That is, when the actual price level exceeds the expected price level by 1, the quantity of output supplied will exceed the natural level of output by $2 billion. Suppose the natural level of output is $50 billion of real GDP and that people expect a price level of 105. On the following graph, use the purple line (diamond symbol) to plot this economy's long-run aggregate supply (LRAS) curve. Then use the orange line segments (square symbol) to plot the economy's short-run aggregate supply (AS) curve at each of the following price levels: 95, 100, 105, 110, and 115. ? 125 120 AS 115 110 105 LRAS 100 95 90 85 80 75 10 20 30 40 50 60 70 80 90 100 OUTPUT (Billions of dollars) The short-run quantity of output supplied by firms will fall below the natural level of output when the actual price level the price level that people expected. PRICE LEVEL
Suppose the economy's short-run aggregate supply (AS) curve is given by the following equation: Quantity of Output Supplied = Natural Level of Output + a x (Price LevelActuat Price LevelExpecte The Greek letter a represents a number that determines how much output responds to unexpected changes in the price level. In this case, assume that a = $2 billion. That is, when the actual price level exceeds the expected price level by 1, the quantity of output supplied will exceed the natural level of output by $2 billion. Suppose the natural level of output is $50 billion of real GDP and that people expect a price level of 105. On the following graph, use the purple line (diamond symbol) to plot this economy's long-run aggregate supply (LRAS) curve. Then use the orange line segments (square symbol) to plot the economy's short-run aggregate supply (AS) curve at each of the following price levels: 95, 100, 105, 110, and 115. ? 125 120 AS 115 110 105 LRAS 100 95 90 85 80 75 10 20 30 40 50 60 70 80 90 100 OUTPUT (Billions of dollars) The short-run quantity of output supplied by firms will fall below the natural level of output when the actual price level the price level that people expected. PRICE LEVEL
Chapter20: Aggregate Demand And Supply
Section: Chapter Questions
Problem 8SQP
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