Assume that an economy is initially operating at the natural rate of output (Y ). A short-run
aggregate supply equation is given by Y t = Y + α ( P t − P te ) ,
where Y is output, P is the price level, P e is the expected price level, and α > 0
Y t = Y + α ( P t − P te )
a) The slope of Aggregate supply curve is 1/a.
b) The slope of AS curve ( 1/a ) increases as the fraction of firms with flexible prices increases in the sticky-price model and follow a direct relationship. Therefore, if a greater proportion of firms follows the sticky-price rule, the AS curve will be flatter which means the slope decreases..
c) In the short run ,this positive AD shock moves output above its natural rate and P above the level people had expected. AD=C+I+G+NXA, D, equals, C, plus, I, plus, G, plus, N, X equation, anything that increases C, I, G, or NX will shift AD to the right. Due to the shift output has increased.
In the long run, Pe rises, LRAS shifts up, and output returns to its natural rate.
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