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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
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 = $4 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 $4 billion. Suppose the natural level of output is $40 billion of real GDP and that people expect a price level of 110. On the following graph, use the purple llne (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: 100, 105, 110, 115, and 120. 125 120 AS 115 110 c 105 LRAS 100 95 PRICE LEVEL 90 85 80 75 0 'l D 20 30 4D 50 ED 70 80 90 100 OUTPUT (Billions of dollars)
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