Chapter 16, Problem 10P

To determine

Concept Introduction:

Gross Domestic Product (GDP): It is defined as the value of output which is produced domestically within a country in the given interval of time.

Slump: Every economy faces different business cycles at different points of time. Recession is one such business cycle. During recession, there is huge unemployment and fall in production of goods and services. Recession slows down business activities.
The main reason for such phenomenon is the lack of demand and low investment level. When the recession is for a longer duration it is known as depression or Slump. Therefore, slump is the period in an economy when demand and production for goods and services decrease.

Aggregate Demand Curve (AD): It shows how price and the quantity demanded are related to each other. The curve is negatively slopped which means that when prices rise the quantity demanded falls.

Aggregate Supply Curve (AS): It shows how price and the quantity supplied are related to each other. The curve is positively slopped which means that when prices rise, the quantity supplied also rises. The curve depends on the duration of time.

Short Run Aggregate Supply (SRAS): It is a positively slopped curve in which supply increases when price rises. The reason for upward slopping is that the wages are sticky in the short run due to formal or informal contracts. At higher aggregate prices there is higher profit leading to high level of output.

Long Run Aggregate Supply (LRAS): It is a vertical curve which means it is independent of price. When price increases there is no change in quantity supplied. In the long run, nominal wages are not fixed rather it can be negotiated.