Question

 6. Why the aggregate supply curve slopes upward in the short run

 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 misperceptions theory asserts that changes in the price level can temporarily mislead firms about what is happening to their output prices. Consider a soybean farmer who expects a price level of 100 in the coming year. If the actual price level turns out to be 110, soybean prices will ___rise____  , and if the farmer mistakenly assumes that the price of soybeans increased relative to other prices of goods and services, she will respond by reducing the quantity of soybeans supplied. If other producers in this economy mistake changes in the price level for changes in their relative prices, the unexpected increase in the price level causes the quantity of output supplied to fall below 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:

 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 = S2 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 $50 billion of real GDP and that people expect a price level of 105.

 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: 95, 100, 105, 110, and 115.

 The short-run quantity of output supplied by firms will fall below the natural level of output when the actual price level rises above the price level that people expected.

Answer 1

(a) When actual price level is higher than expected price of 100, prices will Rise and firms will respond by Increasing the quantity of output supplied. The unexpected increase in price level will make the quantity of output supplied to Rise above the natural output.

(b) Data used:

Natural output	α	Price level (Actual)	Price level (Expected)	α x [Price level(Actual) - Price level(Expected)]	Quantity of Output Supplied
(A)	(B)	(C)	(D)	(F) = (B) x [(C) - (D)]	(A) + (F)
50	2	95	105	-20	30
50	2	100	105	-10	40
50	2	105	105	0	50
50	2	110	105	10	60
50	2	115	105	20	70

(c) Graph

(d) Short run output supplied by firms will fall below natural output when actual price level Falls below the price level which the people anticipated.