Assuming that Okuns law is given by U U n = 0.75 (Y Y
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Assuming that Okun’s law is given by U – Un = –0.75 × (Y – YP) and that the Phillips curve is given by π = πe - 0.6 × (U – Un) + ρ,
a) Obtain the short-run aggregate supply curve if expectations are adaptive, inflation was 3% last year, and potential output is $10 trillion (assume ρ = 0).
b) Calculate inflation when output is $8, $10, and $12 trillion, and plot the short-run aggregate supply curve.
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