ple, the sticky-wage theory asserts that output prices adjust more quickly to changes in the price level than wages wage contracts. Suppose a firm signs a contract agreeing to pay its workers $15 per hour for the next year, based or po. If the actual price level turns out to be 110, the firm's output prices will vill remain fixed at the contracted level. The firm will respond to the unexpected increase in the price level by ,and the wages t supples. If many firms face simlarly rigid wage contracts, the unexpected Increase In the price level causes the quant the natural level of output in the short run. che economy's short-run aggregate supply (AS) curve is given by the following equation: tity of Output Supplicd = Natural Level of Output + a x (Price Level stual – Price LevelgBepected) k letter a represents a number that determines how much output responds to unexpected changes in the price level. $4 billion. That is, when the actual price level exceeds the expected price level by 1, the quantity of output supplied mutput by s4 billion. the natural level of output is $40 billion of real GDP and that people expect a price level of 110. pllowing graph, use the purple line (diamond symbol) to plot this economy's long-run aggregate supply (LRAS) curve. nents (square symbol) to plot the economy's short-run aggregate supply (AS) curve at each of the following price leve
ple, the sticky-wage theory asserts that output prices adjust more quickly to changes in the price level than wages wage contracts. Suppose a firm signs a contract agreeing to pay its workers $15 per hour for the next year, based or po. If the actual price level turns out to be 110, the firm's output prices will vill remain fixed at the contracted level. The firm will respond to the unexpected increase in the price level by ,and the wages t supples. If many firms face simlarly rigid wage contracts, the unexpected Increase In the price level causes the quant the natural level of output in the short run. che economy's short-run aggregate supply (AS) curve is given by the following equation: tity of Output Supplicd = Natural Level of Output + a x (Price Level stual – Price LevelgBepected) k letter a represents a number that determines how much output responds to unexpected changes in the price level. $4 billion. That is, when the actual price level exceeds the expected price level by 1, the quantity of output supplied mutput by s4 billion. the natural level of output is $40 billion of real GDP and that people expect a price level of 110. pllowing graph, use the purple line (diamond symbol) to plot this economy's long-run aggregate supply (LRAS) curve. nents (square symbol) to plot the economy's short-run aggregate supply (AS) curve at each of the following price leve
Essentials of Economics (MindTap Course List)
8th Edition
ISBN:9781337091992
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter23: Aggregate Demand And Aggregate Supply
Section: Chapter Questions
Problem 10PA
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Question
Transcribed Image Text: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 sticky-wage theory asserts that output prices adjust more quickly to changes in the price level than wages do, in part because of
long-term wage contracts. Suppose a firm signs a contract agreeing to pay its workers $15 per hour for the next year, based on an expected price
level of 100. If the actual price level turns out to be 110, the firm's output prices will
v, and the wages the firm pays its
workers will remain fixed at the contracted level. The firm will respond to the unexpected increase in the price level by
the quantity of
output It supplles. If many firms face simlarly rigld wage contracts, the unexpected Increase In the price level causes the quantity of output supplled
to
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:
Quantity of Output Supplied = Natural Level of Output + a x (Price Level Aetunl
Price Level Expected)
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 = $4 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 $4 billon.
Suppose the natural level of output is $40 billion of real GDP and that people expect a price level of 110.
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: 100, 105, 110, 115,
and 120.
125
120
AS
115
110
105
LRAS
100
95
90
85
+
B0
75
10
20
30
40
50
60
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
v the price
level that people expected.
PRICE LEVEL
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