If the short-run aggregate supply curve is π = πe

Question

If the short-run aggregate supply curve is π = πe - 1.2 (Y - YP) + ρ, output equals potential output and there is a price shock of minus two, then the inflation rate is ________.
A) 2
B) πe - 2
C) minus 2
D) minus 2.4
E) none of the above

Quizplus · Accepted Answer

When output equals potential output (Y = YP), the term (Y - YP) becomes zero, simplifying the equation to π = πe + ρ. Given a price shock of minus two (ρ = -2), the inflation rate becomes π = πe - 2.