Problem :
What relationship does the aggregate supply curve show?
The aggregate supply curve shows the relationship between the
price level and the quantity of goods and services
supplied in an economy.
Problem :
What is the equation for the aggregate supply curve in the
short run?
The equation for the aggregate supply curve in the short run
is Y = Ynatural + a(P - Pexpected).
Problem :
What does each of the terms mean in the equation for the
short-term aggregate supply curve and what does the equation
mean overall?
The equation for the short run aggregate supply curve, is Y =
Ynatural + a(P - Pexpected). In this equation,
Y is
output,
Ynatural is the natural rate of output that
exists when all productive factors are used at their normal
rates, a is a constant greater than zero,
P is the
price level, and
Pexpected is the expected price
level. This equation means that output deviates from the
natural rate of output when the price level deviates from the
expected price level.
Problem :
What is the slope of both the short run aggregate supply curve
and of the long run aggregate supply curve?
The slope of the short-term aggregate supply curve is (1/a);
the long-term aggregate supply curve is vertical and therefore
has no slope.
Problem :
Give one reason for why the long-term aggregate supply curve
is vertical and four models for why the short-term aggregate
supply curve is upward sloping.
The long run aggregate supply curve is vertical because output
in the long run is fixed by the factors of production,
namely capital and labor. Four models for why the
short run aggregate supply curve is upward sloping are
the sticky-wage model, the worker-misperception model, the
imperfect-information model, and the sticky-price model.
