Chapter 18, Problem 2FRQ

a)

To determine

The graph representing the SRAS curve.

Explanation of Solution

The short-run aggregate supply curve would represent as follows:

  

The graph shows the aggregate price level on the vertical axis and real GDP on the horizontal axis. In the short run, aggregate supply or output would increase with the increase in price because the economy or amount of real GDP produced in the country increase with the price increase. Therefore, the curve would be an upward slope which is labeled as SRAS.

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.

b)

To determine

The graph representing the decrease in the SRAS curve.

Explanation of Solution

After the decrease in the SRAS curve, the graph of the short-run aggregate supply curve would represent as follows:

  

The graph shows the aggregate price level on the vertical axis and real GDP on the horizontal axis. When there is a decrease in the short-run aggregate supply curve, the SRAS₁ curve would shift to the left which is labeled as SRAS₂ and it represents an upward slope but behind the SRAS₁ where the output is labeled as Y_p2. Due to a decrease in factors of production such as labor, land, capital, etc. the short-run aggregate supply would also decrease.

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.

c)

To determine

Possible three causes that change the short-run aggregate supply curve.

Explanation of Solution

The causes of the decrease in SRAS involve the decrease in factors of production or a decline in the number of resources such as labor, land, capital, entrepreneurship, etc. This shifts the SRAS curve to the left because due to a decrease in these factors, the aggregate supply, in the short run, would also decrease.

Moreover, an increase in the price of resources such as the price of natural resources then there would a decrease in SRAS which shifts the curve leftward. And, increase in the cost of production lowers the use of expensive machinery or expensive technology which can slow down the speed of production and provide less efficiency in manufacturing. This, in turn, decreases the aggregate supply in the short run and the curve will move to the left.

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.