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-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 90, the firm's output prices will , and the wages the firm pays its workers will remain fixed at the contracted level. The firm will respond to the unexpected decrease in the price level by the quantity of output it supplies. If many firms face similarly rigid wage contracts, the unexpected decrease in the price level causes the quantity of output supplied to the natural level of output in the short 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-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 90, the firm's output prices will , and the wages the firm pays its workers will remain fixed at the contracted level. The firm will respond to the unexpected decrease in the price level by the quantity of output it supplies. If many firms face similarly rigid wage contracts, the unexpected decrease in the price level causes the quantity of output supplied to the natural level of output in the short run.

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter15: Aggregate Demand And Aggregate Supply

Section: Chapter Questions

Problem 10PA

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Question

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-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 90, the firm's output prices will
, and the wages the firm pays its workers will remain fixed at the
contracted level. The firm will respond to the unexpected decrease in the price level by
v the quantity of output it supplies. If many firms face similarly rigid wage
contracts, the unexpected decrease in the price level causes the quantity of output supplied
the natural level of output in the short run.

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