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 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 90, the firm's output prices will , and the wages the firm pays its workers will remain fixed at the contracted level. The firm will respond to the unexpected decrease in the price level by the quantity of output it supplies. If many firms face similarly rigid wage contracts, the unexpected decrease in the price level causes the quantity of output supplied to 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 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 90, the firm's output prices will , and the wages the firm pays its workers will remain fixed at the contracted level. The firm will respond to the unexpected decrease in the price level by the quantity of output it supplies. If many firms face similarly rigid wage contracts, the unexpected decrease in the price level causes the quantity of output supplied to 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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Similar questions

Explain briefly three important reasons why firms have sticky prices in the short run. Given an example of a price that is sticky in the short run but flexible in the long run.
Which of the following causes the short-run aggregate supply curve to shift to the right? O A. an increase in the expected price of an important natural resource B. a positive technological change O C. a higher expected future price level O D. a decrease in the capital stock
Along the long-run aggregate supply curve, the level of Real GDP supplied with increases in the price level. O does not change O increases O decreases slightly O decreases dramatically
1) What effects might each of the following have on aggregate demand/aggregate supply? In each case use a diagram to illustrate the effect, explain why shifts occurred, and state the impact of each event on the price levels, the unemployment rate, and real GDP. a. Congress passes into law a $1.5 billion cut in personal income taxes. b. Significant technological advances in the renewable energy sector decrease the price of all electricity by 50% c. Increases in consumer confidence lead to a positive demand shock.
Suppose an economy is in long-run equilibrium. The central bank reduces the money supply by 5 percent. Use your diagram to show what happens to output and the price level as the economy moves from the initial to the new short-run equilibrium. Price Level LRAS Aggregate Supply Aggregate Demand Quantity of Output Now adjust the graph to show the new long-run equilibrium. Aggregate Demand € Aggregate Supply What causes the economy to move from its short-run equilibrium to its long-run equilibrium? The government increases spending to increase aggregate demand. Nominal wages, prices, and perceptions adjust downward to this new price level. O The government increases taxes to curb aggregate demand. O Nominal wages, prices, and perceptions adjust upward to this new price level.
Suppose the economy is in the long-run equilibrium. b. Now suppose war in the world's main oil- producing region sharply reduces the world oil supply, causing oil prices to rise and increasing the costs of producing goods and services in this economy. Use your diagram to show what happens to output and the price level in the short run. c. Use the sticky-wage theory of aggregate supply to explain what will happen to output and the price level in the long run (assuming there are no policy changes). What role does the expected price level play in this adjustment? Be sure to illustrate your analysis in a graph.
Determine whether each of the following would cause a shift of the aggregate demand curve, a shift of the aggregate supply curve, a shift in neither curve, or shift in both curves. If a shift is caused, indicate which curve shifts, and in which direction it shifts. What happens to aggregate output and the price level in each case? 4. The wages rate decreases.
6. Suppose political turmoil causes a significant decrease in oil production in the middle east. How will real GDP, employment, and the general price level be affected in the short run? 7. How will the event described in question 6 affect real GDP, employment, and the general price level in the long run? Explain in words and a graph.
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Which of the following would cause the Aggregate Supply curve to move from AS to AS2 in the graph below? A) A general increase in energy and labor cost for businesses. B) A general decrease in labor cost for businesses. C) An increase in productivity. D) A federal government increase in spending.