A.

The sort run aggregate supply curve gives the output the producers willing and able to
supply at different level of inflation. The curve depicts the positive relationship between
inflation and output. It is given as

yt yn pt wt
. (1)

In the equation above pt is actual price level in period t, yt is the output in period t, yn is
the natural output.

B.

Assuming wt=pte; from (1)

yt yn pt pte
yn yt pte p t
. (2)

That is now the actual output from natural output is directly proportional to fluctuation in
price level from its expected level. As worker see actual price level is greater than its
expected level, they decrease their labor supply hence, decreasing the actual output below
its natural level.

The Phillips curve states the relationship between price level and unemployment in a
given period of time given the adaptive expectation and supply shock in an economy. The
equation of the Phillips curve is given as

pt pte yt yn

In the equation above t is actual price level in period t, t is expected price level, yt is
pe
the output in period t, yn is the natural output.

Assuming ; (2) becomes

pt pte yt yn

Therefore, if the worker set the nominal wages equal to expected price level, the
aggregate supply gives the Phillips curve.

C.

The equation of IS-LM curve is given as

yt it te1
(3)
mt pt yt it . (4)

Assuming, t 1 pt 1 pt (3) becomes

e e

yt it pte1 pt
.. (5)

Substituting (5) in (4)

mt pt it pte1 p t it
or , mt 1 pt it pte1

or , pt

pte1
i mt
1 1 t 1 .. (6)

The equation (6) above gives the aggregate demand curve of the economy.

D.

Assuming pt pt 1 ; (6) becomes

e

pt * it mt

Substituting this in AS in (2)

yt * yn pte it m t