2. Short-run Aggregate Supply and the Phillips CurveSuppose that the economy is populated by two types of firms, firms with sticky pricesand firms with flexible prices. These firms set their prices according top° =EP,p =P+a(Y – Y),where the superscript s and f denotes sticky and flexible price firms. Suppose the fractionof firms with sticky prices is equal to 6, meaning that 1 -0 firms have flexible prices.Further, let a = 2 and 0 = 0.75.(a) Derive the short-run aggregate supply curve. Suppose that the natural rate of out-put is given by Ỹ = 100 and EP = 40. Plot the SRAS for output levels ranging from0 to 200.%3D(b) Suppose that new technology reduces the fraction of firms with sticky prices from0 = 0.5. Is the new short-run aggregate supply curve steeper or flatter than thecurve found in (a)? Plot this curve in the same diagram for the same values of P.(c) Suppose Okun's Law obeys a(Y - Y)Assume that the fraction of sticky price firms remains at 0this Phillips curve.-B(u – u") where B3 and u"5.0.5. Derive and plot(d) Now suppose that expectations are formed adaptively so that En = T_1 and TheBank of Canada wants to reduce the inflation rate by 2%. What will happen tounemployment and output? What is the sacrifice ratio??

As per the given informationFirms set their prices as per sticky price and flexible price =0.75---…

Suppose that the economy is populated by two types of firms, firms with sticky prices and firms with flexible prices. These firms set their prices according to ps = EP, pf = P + a(Y-Y), where the superscripts and f denotes sticky and flexible price firms. Suppose the fraction of firms with sticky prices is equal to 0, meaning that 1 - 0 firms have flexible prices. Further, let a = 2 and 0 = 0.75.

Suppose that the economy is populated by two types of firms, firms with sticky prices and firms with flexible prices. These firms set their prices according to ps = EP, pf = P + a(Y-Y), where the superscripts and f denotes sticky and flexible price firms. Suppose the fraction of firms with sticky prices is equal to 0, meaning that 1 - 0 firms have flexible prices. Further, let a = 2 and 0 = 0.75.

Principles of Macroeconomics (MindTap Course List)

7th Edition

ISBN:9781285165912

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter22: The Short-Run Trade-off Between Inflation And Unemployment

Section: Chapter Questions

Problem 3PA

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