The economy of Carmona is represented by the following Lucas supply function: Y = 600 + 40(P - Pe ). The current price level in Carmona is 1.8, and the expected price level is 1.95.
a. What will be the new level of real output if inflation expectations are correct?
b. What will be the new level of real output if inflation expectations are wrong and the actual price level rises to 2.0?
c. What will be the new level of real output if the actual price level does not change?
d. What is the value of the "price surprise" in parts a, b, and c?