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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

List and explain the three theories for why the short-run aggregate-supply curve slopes upward.

To determine

Why short run aggregate supply curve slopes upward.

Explanation

The supply depends upon the price level in the economy. When the price level is higher, the suppliers will be receiving higher income and this would incentivize them to increase the supply in the economy and vice versa. The aggregation of the supply curves of all the firms in the economy is known as the aggregate supply curve. In the short run period, the aggregate supply curve represents the relationship between the price level in the economy and the supply by the firms.

In the short run period, the increase in the prices of the final goods and services supplied by the firms increases rapidly than the increase in the price of the inputs of production because of the sticky-wages theory. As a result of the higher increase in the price of the final goods than the inputs, the firms will be able to earn higher rates of profits from their production and quantity produced. As the profit from the production is higher, the firms will be willing to produce more and supply more at the higher price levels and vice versa. Thus, there is a direct relation between the price level and aggregate supply in the short run. This is the main reason why the short run aggregate supply (SRAS) slopes upward.

There is another reason for the SRAS to slope upward...

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