6. Why the aggregate supply curve slopes upward in the short runIn the short run, the quantity of output supplied by firms can deviate from the natural level of output if the actual price level deviates from theexpected price level in the economy. A number of theories explain reasons why this might happen.For example, the sticky-price theory asserts that the output prices of some goods and services adjust slowly to changes in the price level. Supposefirms announce the prices for their products in advance, based on an expected price level of 100 for the coming year. Many of the firms sell theirgoods through catalogs and face high costs of reprinting if they change prices. The actual price level turns out to be 110. Faced with high menu costs,the firms that rely on catalog sales choose not to adjust their prices. Sales from catalogs will not change, and firms that rely on catalogs willrespond by lowering the quantity of output they supply. If enough firms face high costs of adjusting prices, the unexpected increase in the pricelevel causes the quantity of output supplied to fall short of 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-Price Levelged)The Greek letter a represents a number that determines how much output responds to unexpected changes in the price level. In this case, assumethat 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 naturallevel of output by $2 billion.Suppose the natural level of output is $60 billion of real GDP and that people expect a price level of 110.On the following graph, use the purple line (diamond symbol) to plot this economy's long-run aggregate supply (LRAS) curve. Then use the orangeline segments (square symbol) to plot the economy's short-run aggregate supply (AS) curve at each of the following price levels: 100, 105, 110, 115,and 120. Homework (Ch 20)line segments (square symbol) to plot the economy's short-run aggregate supply (AS) curve at each of the following price levels: 100, 105, 110, 115,and 120PRICE LEVEL12512011511010510095902 28075010 2030 40 50 60 70OUTPUT (Billions of dollars)80 90 100ASLRASThe short-run quantity of output supplied by firms will fall short of the natural level of output when the actual price levellevel that people expected.the price

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6. Why the aggregate supply curve slopes upward in the short run In the short run, the quantity of output supplied by firms can deviate from the natural level of output if the actual price level deviates from the expected price level in the economy. A number of theories explain reasons why this might happen. For example, the sticky-price theory asserts that the output prices of some goods and services adjust slowly to changes in the price level. Suppose firms announce the prices for their products in advance, based on an expected price level of 100 for the coming year. Many of the firms sell their goods through catalogs and face high costs of reprinting if they change prices. The actual price level turns out to be 110. Faced with high menu costs, the firms that rely on catalog sales choose not to adjust their prices. Sales from catalogs will not change, and firms that rely on catalogs will respond by lowering 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 fall short of the natural level of output in the short run.

6. Why the aggregate supply curve slopes upward in the short run In the short run, the quantity of output supplied by firms can deviate from the natural level of output if the actual price level deviates from the expected price level in the economy. A number of theories explain reasons why this might happen. For example, the sticky-price theory asserts that the output prices of some goods and services adjust slowly to changes in the price level. Suppose firms announce the prices for their products in advance, based on an expected price level of 100 for the coming year. Many of the firms sell their goods through catalogs and face high costs of reprinting if they change prices. The actual price level turns out to be 110. Faced with high menu costs, the firms that rely on catalog sales choose not to adjust their prices. Sales from catalogs will not change, and firms that rely on catalogs will respond by lowering 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 fall short of the natural level of output in the short run.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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