If Okun's law is U - Un = - 0.6 (Y - YP), and the Phillips curve is π = πe - 2.5 (U - Un ) + ρ, then the short-run aggregate supply curve is ________.
A) π = πe - 1.5 (Y - YP) + ρ
B) π = πe + 4.2 (Y - YP) + ρ
C) π = πe - 2.5 (Y - YP) + ρ
D) π = πe - 2.5 (Y + YP) + ρ
E) none of the above

Question

Quizplus · Accepted Answer

The short-run aggregate supply curve can be derived by substituting Okun's law into the Phillips curve. Substituting U - Un = -0.6(Y - YP) into the Phillips curve equation π = πe - 2.5(U - Un) + ρ gives π = πe - 2.5(-0.6(Y - YP)) + ρ, which simplifies to π = πe - 1.5(Y - YP) + ρ.

If Okun's Law Is U - Un = - 0