• Equilibrium price level, labeled PL1 Equilibrium real output, labeled Y1 • Assume there is an increase in imports to Econland. Using your graph, show the effect of the increase in imports to the short-run equilibrium of Econland. Label the new level of output Y2 and the new price level PL2.

6. Why the aggregate supply curve slopes upward in the short run In the short run, the quantity of output supplied by firms can deviate from the natural level of output if the actual price level deviates from the expected price level in the economy. A number of theories explain reasons why 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 level turns out to be 90, soybean prices will and if the farmer mistakenly assumes that the price of soybeans declined relative to other prices of goods and services, 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 to level of output in the short run. she…

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. PRICE LEVEL 125 120 115 + 110 105 100 95 90 85 80 75 0 10 20 30 40 50 60 70 OUTPUT (Billions of dollars) 80 90 100 0 AS LRAS ? The short-run quantity of output supplied by firms will fall short of the natural level of output when the actual price level level that people expected. the price

6. Why the aggregate supply curve slopes upward in the short run In the short run, the quantity of output supplied by firms can deviate from the natural level of output if the actual price level deviates from the expected price level in the economy. A number of theories explain reasons why 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 not change, and firms that rely on catalogs will respond by lowering the quantity of output they supply. If enough firms face high costs of…