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 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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