2. 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 rate 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 sticky price theory asserts that output prices of some goods and services adjust slowly to changes in the price level. Suppose that firms announce the prices for their products in advance, based on an expected price level of 100 for the coming year. Additionally, assume that many of the firms sell their goods through catalogues and face high costs of reprinting if they change prices. Now suppose that the actual price level turns out to be 110 (that is, prices in the economy are higher than expected). Faced with high menu costs, the firms that rely on catalogue sales choose not to adjust their prices. Sales from catalogues will and firms that rely on catalogues will respond by, quantity of output they supply. If enough firms face high costs of adjusting prices, the unexpected increase in the price level causes the quantity of output supplied to the natural rate of output in the short run. the
2. 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 rate 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 sticky price theory asserts that output prices of some goods and services adjust slowly to changes in the price level. Suppose that firms announce the prices for their products in advance, based on an expected price level of 100 for the coming year. Additionally, assume that many of the firms sell their goods through catalogues and face high costs of reprinting if they change prices. Now suppose that the actual price level turns out to be 110 (that is, prices in the economy are higher than expected). Faced with high menu costs, the firms that rely on catalogue sales choose not to adjust their prices. Sales from catalogues will and firms that rely on catalogues will respond by, quantity of output they supply. If enough firms face high costs of adjusting prices, the unexpected increase in the price level causes the quantity of output supplied to the natural rate of output in the short run. the
Principles of Economics, 7th Edition (MindTap Course List)
7th Edition
ISBN:9781285165875
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter33: Aggregate Demand And Aggregate Supply
Section: Chapter Questions
Problem 5PA
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Transcribed Image Text:2. 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 rate 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 sticky price theory asserts that output prices of some goods and services adjust slowly to changes in the price level. Suppose that
firms announce the prices for their products in advance, based on an expected price level of 100 for the coming year. Additionally, assume that many
of the firms sell their goods through catalogues and face high costs of reprinting if they change prices. Now suppose that the actual price level turns
out to be 110 (that is, prices in the economy are higher than expected). Faced with high menu costs, the firms that rely on catalogue sales choose not
to adjust their prices. Sales from catalogues will
, and firms that rely on catalogues will respond by
the
quantity of output they supply. If enough firms face high costs of adjusting prices, the unexpected increase in the price level causes the quantity of
output supplied to
the natural rate of output in the short run.
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