Question

A Briefly explain why the shape of the SRAS curve is relatively flat during severe recession and increasingly slopes upward as the economy reaches full employment and beyond. Explain why AD curve slopes downward.

Answer 1

A) During recession output level is low and hence the level of unemployment is high . Thus in short run the output can be increased without much increase in cost and if cost won't increase then prices won't increase and hence SRAS curve would be flat i.e a large amount of output can be produced at a given price. As economy reaches full employment there won't be labour force to hire so due to dearth of labour wages will increase and hence prices thus aggregate supply curve would be upward sloping.

B) Aggregate demand curve shows relationship between price and quantity demanded. As prices increases quantity demanded will fall thus showing negative relationship between price and quantity.