Sub part (a): Explanation The supply is dependent 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. According to the sticky wage theory, in the short run period, the economy is in a recession because the fall in the general price level has increased the real wage rate of the economy. But the demand for the labor in the economy will be lower since the economy is in recession. Thus, in the long run, the sticky wages will adjust to the level of recession in the economy, which will reduce the real wage rates and bring back the economy into equilibrium and full employment level... Sub part (b): To determine Why short run aggregate supply curve is upward sloping.

Why short run aggregate supply curve is upward sloping.

Principles of Macroeconomics (MindTap Course List)

7th Edition

ISBN: 9781285165912

Author: N. Gregory Mankiw

Publisher: Cengage Learning

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Question

Chapter 20, Problem 6PA

Sub part (a):

To determine