Question

5. The Short Run Aggregate Supply curve only shifts when there are changes in expectations about inflation, E[π]. If π₀ is the initial inflation rate, which of the following must be true in initial equilibrium?
   1. E[π] < π₀
   2. E[π] = π₀
   3. Only the SRAS and DAD curves must intersect
   4. E[π] > π₀

Answer 1

Initially inflation=expected inflation where SRAS and AD intersects. then changes in the expectation about inflation shifts the aggregate supply curve. Option b is correct.

Answer 2

In the initial equilibrium, when considering the Short Run Aggregate Supply (SRAS) curve, it is assumed that expectations about inflation (E[π]) are formed based on the current inflation rate (π0).

Therefore, in the initial equilibrium, the following statement must be true:

E[π] = π0

This means that the expectations about inflation are equal to the current inflation rate.