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PRICE LEVEL 125 120 115 110 105 100 95 90 85 80 75 + AS LRAS 20 0 10 30 40 70 80 90 100 50 60 OUTPUT (Billions of dollars) The short-run quantity of output supplied by firms will fall below the natural level of output when the actual price level level that people expected. the price

PRICE LEVEL 125 120 115 110 105 100 95 90 85 80 75 + AS LRAS 20 0 10 30 40 70 80 90 100 50 60 OUTPUT (Billions of dollars) The short-run quantity of output supplied by firms will fall below the natural level of output when the actual price level level that people expected. the price

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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PRICE LEVEL 125 120 115 110 105 100 95 90 85 80 75 AS LRAS 0 10 30 40 70 80 90 100 50 60 OUTPUT (Billions of dollars) The short-run quantity of output supplied by firms will fall below the natural level of output when the actual price level level that people expected. 20 the price
Transcribed Image Text:PRICE LEVEL 125 120 115 110 105 100 95 90 85 80 75 AS LRAS 0 10 30 40 70 80 90 100 50 60 OUTPUT (Billions of dollars) The short-run quantity of output supplied by firms will fall below the natural level of output when the actual price level level that people expected. 20 the price
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. rise I 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 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 increasing the quantity of output it supplies. If many firms face similarly rigid wage contracts, the unexpected increase in the price level causes the quantity of output supplied to rise above 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.
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. rise I 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 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 increasing the quantity of output it supplies. If many firms face similarly rigid wage contracts, the unexpected increase in the price level causes the quantity of output supplied to rise above 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.
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