Question

Why the aggregate supply curve slopes upward in the short run quantity of output that firms supply can deviate from the natural level of output if the actual price level in the economy devi om the expected price level. Several theories explain how this might happen or example, the sticky-price theory asserts that the output prices of some goods and services adjust slowhy irms announce the prices for their products in advance, based on an expected price level of poods through catalogs and face high costs of reprinting if they change prices. The actual price level turns out to be the firms that rely on catalog sales choose not to adjust their prices. Sales from catalogs will to changes in the price level. Suppo 100 for the coming year. Many of the firms sell their 110. Faced with high menu cos and firms that rely on catalog prices, the unexpected increase in t will respond price level causes the quantity of output supplied to ▼the quantity of output they supply. Ir enough firms face high natural level of out by . remain the same th rise Suppose the economy's short-run aggregate supply (AS) curve is given by the following equa fall Quantity of Output Supplied -Natural Level of Output + a x (Price Levelncnel - Price Levelsqpectend The Greek letter a represents that d that a - $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 level of output by $2 billion. Suppose the natural level of output is $60 billion of real GDP and that people expect a price level of 110. a number that determines how much output responds to unexpected changes in the price level. In this case, assume 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 nconomy's short-run aggregate supply (AS) curve at each of the following price levels: 100, 105, 110, 115 and 120, AS LRAS

Answer 1

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