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

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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5. 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 sticky-wage theory asserts that output prices adjust more quickly to changes in the price level than wages do, in part because of long-term wage contracts. Suppose a firm signs a contract agreeing to pay its workers $15 per hour for the next year, based on an expected price level of 100. If the actual price level turns out to be 110, the firm's output prices will v, and the wages the firm pays its workers will remain fixed at the contracted level. The firm will respond to the unexpected increase in the price level by the quantity of output It supplles. If many firms face simlarly rigld wage contracts, the unexpected Increase In the price level causes the quantity of output…
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Suppose that the aggregate demand and aggregate supply schedules for a hypothetical economy are as shown in the following table Amount of Price Level Amount of Real GDP (Price Index) Real GDP Demanded, Supplied, Billions Billions $100 300 $450 200 250 400 300 200 300 400 150 200 500 100 100 a. Use the data above to graph the agregate demand and aggregate supply curves. What are the…