Question

5. 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 us out to be 90, soybean prices will services, she will respond by ▼ 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 decrease in the price level causes the quantity of output supplied tothe natural level of output in the short run. ,and if the farmer mistakenly assumes that the price of soybeans declined relative to other prices of goods and Suppose the economy's short-run aggregate supply (AS) curve is given by the following equation: Quantity of Output Supplied-Natural Level of Output + α x (Price Level Actual-Price Level Expected The Greek letter α represents a number that determines how much output responds to unexpected changes in the price level. In this case, assume that α = $2 billion. That is, when the actual price level exceeds the expected price level by 1, the quantity of output supplied will exceed the natural evel 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 100 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: 90, 95, 100, 105, and 110.

Answer 1

Blanks:

1-Fall

2-Reducing

3-Fall below

Quantity supplied = N+a(Actual price level - Expected price level)

N=50

a=2

Expected price level = 100

Quantity supplied: 50+2(90-100) = 30

50+2(95-100) = 40

50+2(100-100) = 50

50+2(105-100) = 60

50+2(110-100) = 70

125 T 120 AS 115 110 LRAS 105 -100 90 85 80 75 0 1020 30 40 5060 70 80 90 100 OUTPUT (Billions of dollars)

The short run quantity of output supplied by firms will rise above the natural level of output when the actual price level Rises above the price level that people expected.