The Greek letter a represents a number that determines how much output responds to unexpected changes in the price level. In this case, assume that a = $2 billion. That is, when the actual price level exceeds the expected price level by 1, the quantity of output supplied will exceed the natural level of output by $2 billion.

Suppose the natural level of output is $60 billion of real GDP and that people expect a price level of 100.

On the following graph, use the purple line (diamond symbol) to plot this economy's long-run aggregate supply (LRAS) curve. Then use the orange line segments (square symbol) to plot the economy's short-run aggregate supply (AS) curve at each of the following price levels: 90, 95, 100, 105, and 110.

The short-run quantity of output supplied by firms will rise above the natural level of output when the actual price level _____ the price level that people expected.

Transcribed Image Text:

PRICE LEVEL 125 120 115 110 105 100 95 90 85 80 75 0 10 20 30 40 50 60 OUTPUT (Billions of dollars) 70 80 90 H 100 AS LRAS PRICE LEVEL 125 120 115 110 105 100 95 90 85 80 75 0 10 20 30 40 50 60 OUTPUT (Billions of dollars) 70 80 90 H 100 AS LRAS

Answer rating: 100% (QA)

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