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-price theory asserts that the output prices of some goods and services adjust slowly to changes in the price level. Suppose firms announce the prices for their products in advance, based on an expected price level of 100 for the coming year. Many of the firms sell their goods through catalogs and face high costs of reprinting if they change prices. The actual price level turns out to be 110. Faced with high menu costs, the firms that rely on catalog sales choose not to adjust their prices. Sales from catalogs will and firms that rely on catalogs will respond by the quantity of output they supply. If enough firms face high costs of adjusting prices, the unexpected increase in the price level causes the quantity of output supplied 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:

Suppose that firms become very pessimistic about future business conditions and cut heavily on investment in capital equipment. [Label A, B, C for the initial, new short-run and new long-run equilibrium respectively] a)Use an aggregate-demand/aggregate-supply model to show the short-run effect of this pessimism on the economy. Label the new levels of prices and real output. Explain in words why the aggregate quantity of output supplied changes. (Use the sticky wage theory in your explanation)

9. Suppose an economy is in long-run equilibrium. Use the model of aggregate demand and aggregate supply to illustrate the initial equilibrium (call it point A). Be sure to include both short-run and long-run aggregate supply. The central bank raises the money supply by 5%. Use your diagram to show what happens to output and the price level as the economy moves from the initial to the new short-run equilibrium (call it point B). Now show the new long-run equilibrium (call it point C). What causes the economy to move from point B to point C? D.) According to the sticky-wage theory of aggregate supply, how do real wages at point A compare to real wages at point B? How do real wages at point A compare to real wages at point C? Please only answer E.) E.) Judging by the impact of the money supply on nominal and real wages, is this analysis consistent with the proposition that money has real effects in the short run but is neutral in the long run?

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 sticky-price theory asserts that the output prices of some goods and services adjust slowly to changes in the price level. Suppose firms announce the prices for their products in advance, based on an expected price level of 100 for the coming year. Many of the firms sell their goods through catalogs and face high costs of reprinting if they change prices. The actual price level turns out to be 90. Faced with high menu costs, the firms that rely on catalog sales choose not to adjust their prices. Sales from catalogs will v , and firms that rely on catalogs will respond by v the quantity of output they supply. If enough firms face high costs of adjusting prices, the unexpected…

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3. Most global markets have been reporting severe contractions, which mainly responding to the COVID-19 pandemic. The situation is worsened by the decrease in people’s confidence in the government as policymakers, spreading a wave of pessimism towards the future prospect of the economy. Explain how such wave of pessimism, ceteris paribus, may lead to short-term economic fluctuations, which will eventually work to push the economy back towards its long-run equilibrium. Use relevant diagrams to support your answer.

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9. Suppose an economy is in long-run equilibrium. Use the model of aggregate demand and aggregate supply to illustrate the initial equilibrium (call it point A). Be sure to include both short-run and long-run aggregate supply. The central bank raises the money supply by 5%. Use your diagram to show what happens to output and the price level as the economy moves from the initial to the new short-run equilibrium (call it point B). Now show the new long-run equilibrium (call it point C). What causes the economy to move from point B to point C? D.) According to the sticky-wage theory of aggregate supply, how do real wages at point A compare to real wages at point B? How do real wages at point A compare to real wages at point C? E.) Judging by the impact of the money supply on nominal and real wages, is this analysis consistent with the proposition that money has real effects in the short run but is neutral in the long run?