QUESTION 1-complete the sentences by selecting of the available options In the s

Question

QUESTION 1-complete the sentences by selecting of the available options In the short run, the aggregate supply curve is[upward sloping/ downward sloping/vertical] because wages are sticky and, therefore, firms increase their output when the price level increases wages are flexible and, therefore, output is independent of the price level o o In the long run, the aggregate supply curve is sloping/vertical] because lupward sloping/ downward o o wages are sticky and, therefore, firms increase their output when the price level increases wages are flexible and, therefore, output is independent of the price level Aggregate demand is [upward sloping/ downward sloping/vertical] because o o as the price level rises, exports decrease due to the international trade effect as the price level rises, interest rates and investment increase QUESTION 2 Refer to the Aggregate-Demand and Aggregate Supply model, in the long run eal GDP is always below potential GDP. there is no unemployment. output is always above potential GDP. there is full employment and real GDP is equal to potential GDP.

Explanation / Answer

Ans1) in the short run the aggregate supply curve is upward slopping because wages are sticky and their firm increase their output when the price level increases. When the real wage that firms pay employees falls, labor becomes cheaper. However, since the amount of output produced for each unit of labor is still the same, firms choose to hire more workers and increase revenues and profits. When firms hire more labor, output increases. Thus, when the price level rises, output increases because of sticky wages.

In the long run the aggregate supply curve is vertical because wages are flexible and therefore output is independent of the price level long-run aggregate supply curve is a vertical line at the economy’s potential level of output.

Aggregate demand is downward sloping because as the price level increases, exports decrease due to international trade effect. as the price level increases interest rates increases domestic investment in foreign countries decreases the real exchange rate appreciates, net exports decrease and aggregate demand decreases

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