Answer to Question #274293 in Microeconomics for Aditi

Question

6. A) Derived the equation of the aggregate supply curve from the wage setting and the price setting relations. 

B) Explain clearly how this curve is affected by a decline in each of the

following:

i)Oil price,

ii) Unemployment benefits, and

iii)Expected price level.

Answer 1

6. A) Aggregate supply is the relationship between the price level and the production of the economy. In the short-run, the aggregate supply is graphed as an upward sloping curve. The short-run aggregate supply equation is: Y = Y* + α(P-Pe).

B) i) Increase in oil price will decrease the aggregate supply and shift the AS curve to the left and vice versa.

ii) Increase in unemployment benefits will decrease the aggregate supply and shift the AS curve to the left and vice versa.

iii) Increase in expected price level will increase the aggregate supply and shift the AS curve to the right and vice versa.