. Why the aggregate supply curve slopes upward in the short run n the short run, the quantity of output that firms supply can deviate from the natural level of output if the actual price level in the economy deviates rom the expected price level. Several theories explain how this might happen. or example, the misperceptions theory asserts that changes in the price level can temporarily mislead firms about what is happening to their utput prices. Consider a soybean farmer who expects a price level of 100 in the coming year. If the actual price level turns out to be 90, soybean rices will , and if the farmer mistakenly assumes that the price of soybeans declined relative to other prices of goods and the quantity of soybeans supplied. If other producers in this economy mistake changes in the price level ervices, she will respond by the natural or changes in their relative prices, the unexpected decrease in the price level causes the quantity of output supplied to evel of output in the short run. uppose the economy's short-run aggregate supply (AS) curve is given by the following equation: Quantity of Output Supplied = Natural Level of Output + ax (Price Level Actual-Price Level Expected) he Greek letter a represents a number that determines how much output responds to unexpected changes in the price level. In this case, assume hat a = $2 billion. That is, when the actual price level exceeds the expected price level by 1, the quantity of output supplied will exceed the natural evel of output by $2 billion. uppose the natural level of output is $50 billion of real GDP and that people expect a price level of 100.
. Why the aggregate supply curve slopes upward in the short run n the short run, the quantity of output that firms supply can deviate from the natural level of output if the actual price level in the economy deviates rom the expected price level. Several theories explain how this might happen. or example, the misperceptions theory asserts that changes in the price level can temporarily mislead firms about what is happening to their utput prices. Consider a soybean farmer who expects a price level of 100 in the coming year. If the actual price level turns out to be 90, soybean rices will , and if the farmer mistakenly assumes that the price of soybeans declined relative to other prices of goods and the quantity of soybeans supplied. If other producers in this economy mistake changes in the price level ervices, she will respond by the natural or changes in their relative prices, the unexpected decrease in the price level causes the quantity of output supplied to evel of output in the short run. uppose the economy's short-run aggregate supply (AS) curve is given by the following equation: Quantity of Output Supplied = Natural Level of Output + ax (Price Level Actual-Price Level Expected) he Greek letter a represents a number that determines how much output responds to unexpected changes in the price level. In this case, assume hat a = $2 billion. That is, when the actual price level exceeds the expected price level by 1, the quantity of output supplied will exceed the natural evel of output by $2 billion. uppose the natural level of output is $50 billion of real GDP and that people expect a price level of 100.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:On the following graph, use the purple line (diamond symbol) to plot this economy's long-run aggregate supply (LRAS) curve. Then use the orange
line segments (square symbol) to plot the economy's short-run aggregate supply (AS) curve at each of the following price levels: 90, 95, 100, 105,
and 110.
PRICE LEVEL
125
120
115
110
105
100
95
90
85
80
75
0
10 20
70
30 40 50 60
OUTPUT (Billions of dollars)
+
80 90 100
AS
LRAS
?
The short-run quantity of output supplied by firms will rise above the natural level of output when the actual price level
level that people expected.
the price
Transcribed Image Text:6. Why the aggregate supply curve slopes upward in the short run
In the short run, the quantity of output that firms supply can deviate from the natural level of output if the actual price level in the economy deviates
from the expected price level. Several theories explain how this might happen.
For example, the misperceptions theory asserts that changes in the price level can temporarily mislead firms about what is happening to their
output prices. Consider a soybean farmer who expects a price level of 100 in the coming year. If the actual price level turns out to be 90, soybean
prices will
▼, and if the farmer mistakenly assumes that the price of soybeans declined relative to other prices of goods and
services, she will respond by
the quantity of soybeans supplied. If other producers in this economy mistake changes in the price level
for changes in their relative prices, the unexpected decrease in the price level causes the quantity of output supplied to
the natural
level of output in the short run.
Suppose the economy's short-run aggregate supply (AS) curve is given by the following equation:
Quantity of Output Supplied = Natural Level of Output + ax (Price Level Actual-Price Level Expected)
The Greek letter a represents a number that determines how much output responds to unexpected changes in the price level. In this case, assume
that a = $2 billion. That is, when the actual price level exceeds the expected price level by 1, the quantity of output supplied will exceed the natural
level of output by $2 billion.
Suppose the natural level of output is $50 billion of real GDP and that people expect a price level of 100.
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