Chapter 18, Problem 2CYU

To determine

The information needed to determine whether it is due to a movement along the SRAS curve or a shift of the LRAS curve if the economy is initially at the potential output and the quantity of aggregate output supplied rises.

Explanation of Solution

The information on aggregate price level is required in this case to determine the movement of short-run aggregate supply and shift in the long-run aggregate supply curve. If there is an increase in the quantity of aggregate output supplied because of the movement of the short-run aggregate supply curve, the aggregate price level will also increase at the same. But if there is an increase in the quantity of aggregate output supplied because of the rightward shift of the LRAS curve, the aggregate price level will not increase.

Moreover, the observation of aggregate output, in the long run, would also help to determine whether it is due to a movement of the short-run aggregate supply curve or a shift of the long-run aggregate supply curve if the economy is at the potential output in the initial stage and then there is an increase in the quantity of aggregate output supplied. Through observation, in the long run, it is easy to determine if the potential output fell back to its initial level, in the long run, there would be only a temporary rise in aggregate output which would be due to the movement of the short-run aggregate supply curve. But if potential output remains at a higher level in the long run, the aggregate output would increase because of the rightward shift of the long-run aggregate supply curve.

Economics Concept Introduction

Introduction: An aggregate supply refers to the total supply of goods and services at different price levels (aggregated) in the economy. In simple words, it is the total quantity that is produced and sold by firms at different prices in the market.