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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 aggregate-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. Identify the expected price level on your graph.
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