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-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 catalogues and face high costs of reprinting if they change prices. The actual price level turns out to be 90. 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 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 $60 billion of real GDP and that people expect a price level of 100.
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-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 catalogues and face high costs of reprinting if they change prices. The actual price level turns out to be 90. 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 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 $60 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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blanks are: (rise or fall or remain the same), (increasing or reducing), (rise above or fall below), (rises above or falls below)
Transcribed Image Text: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-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 catalogues and face high costs of reprinting if they change prices. The actual price level turns out to be 90. 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
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 $60 billion of real GDP and that people expect a price level of 100.
Transcribed Image Text:Suppose the natural level of output is $60 billion of real GDP and that people expect a price level of 100.
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
90
85
80
75
0
10
20
30 40 50 80 70
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
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