Question

Use equations to show how the Short Run Aggregate Supply Curve is related to the short run Phillips Curve.

Answer 1

The Keynesian economists consider a upward sloping aggregate supply curve . When price level increases along the aggregate supply curve , the national output rises . An increase in aggregate national product means increase in employment of labour and therefore reduction in unemployment rate . So an increase in inflation , or increase in price level , is ultimately reducing inflation . Thus the rise in the price level from P0 to P1 ( inflation) results in lowering of unemployment rate . There is inverse relation between the them . Aggregate demand increases , the price level rises , national output increases , unemployment lowers . This is represented by Phillips curve .

Y = Ynatural + a(P - Pexpected) : Supply Curve

= e - (u - u) + : Phillips Curve

Equation series that show derivation of Phillips curve from SRAS :