Assuming Okuns law is given by U-Un = -075(Y-YP) and that the Phillips curve is given by

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Question:

Assuming Okun’s law is given by U-Un = -075(Y-YP) and that the Phillips curve is given by π = πe - 0.6 x(U-Un) + p,

a) Obtain the short-run aggregate supply curve if expectations are adaptive, inflation was 3% last year, and potential output is $10 trillion (assume p =0 ).

b) Calculate inflation when output is $8, $10, and $12 trillion and plot the short-run aggregate supply curve.

Using the expression for the short-run aggregate supply curve obtained in the previous problem, draw the new short-run aggregate supply curve in the same graph if there is a price shock such that p = 2 . Calculate inflation when output is $8, $10, and $12 trillion respectively.