Problem -
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 a agregate 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. identifies the expected price level on your graph.