Question

1-) Assuming Okun’s law is given by U-Un=-075(Y-YP) and that the Phillips curve is given by π=πe-0.6x(U-Un)+p ,
a) Obtain the short-run aggregate supply curve if expectations are adaptive, inflation was 3% last year, and potential output is $10 trillion (assume p =0 ).
b) Calculate inflation when output is $8, $10, and $12 trillion and plot the short-run aggregate supply curve.

Using the expression for the short-run aggregate supply curve obtained in the previous problem, draw the new short-run aggregate supply curve in the same graph if there is a price shock such that p=2 . Calculate inflation when output is $8, $10, and $12 trillion respectively.

Answer 1