If the output gap is constant at minus 2 and the inflation rate has fallen from 6 percent to 5 percent,then next period's short-run aggregate supply curve might be ________.
A)π = 5 - 0.5 (13 - 15)
B)π = 5 + 0.5 (13 - 15)
C)π = 4 + 0.5 (13 - 15)
D)π = 5 + 2 (11 - 15)
E)none of the above

Question

Quizplus · Accepted Answer

The correct equation reflects an expected inflation rate of 5% adjusting for the difference between actual output (13) and potential output (15), with a coefficient that determines the sensitivity of inflation to the output gap. Here, a positive coefficient (0.5) is applied to a negative output gap (-2), indicating that inflation decreases when the output is below potential, consistent with economic theory.

If the Output Gap Is Constant at Minus 2 and the Inflation