The short-run aggregate supply curve (SRAS) can be written as follows: Y = Yf b

Question

The short-run aggregate supply curve (SRAS) can be written as follows: Y = Yf b (p - pe), where Y = real GDP, Yf = full-employment real GDP, p = price level, pe = expected price level, and b is a positive coefficient. The SRAS can be re-written as p = pe - (1/b)(Yf) (1/b)(Y). Then which of the following is true?




A. An increase in pe will cause a rightward shift of the SRAS curve.

B. An increase in pe will cause a leftward shift of the SRAS curve.

C. An increase in Yf will cause a leftward shift of the SRAS curve.

D. Only A and C.

E. Only B and C.

Explanation / Answer

B. An increase in pe will cause a leftward shift of the SRAS curve. We have two ways to write SRAS: Y = Yf + b (p - pe) p = pe - (1/b)(Yf) + (1/b)(Y) A. is false because there is a negative sign on pe in the first equation. This means that an increase in pe will cause a leftward shift in Y. B is correct. C is incorrect. Yf enters into the first equation positively. So, an increase in Yf will increase Y. "Increase" means rightward shift. B is the best answer.

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