5. Why the short-run aggregate supply curve slopes upward This graph shows the s
ID: 1139474 • Letter: 5
Question
5. Why the short-run aggregate supply curve slopes upward This graph shows the short-run aggregate supply curve ( SRAS ) of a hypothetical economy where the currency is the dollar. Last year, the economy was producing at point A. The price level was 145 and the quantity of real GDP supplied was $500 billion. This year, the economy is producing at point B. The price level has fallen to 135 and the quantity of real GDP supplied has fallen to $300 billion. Government officials are confused about why the quantity of output moved from point A to point B, and they ask you for help. First, they tell you that nominal wages fell by the same percentage as the price level.
0 Short-Run Aggregate Supply 180 T SRAS 155 150 140 125 130 125 0 100 200 3 40500600 700 800 REAL GDP (Billions of dollars)Explanation / Answer
Since the price level and nominal wage are reduced in the same proportion, the real wage should not change so that we a decrease in price level leads to no change in the real wage rate.
This now implies that workers mistakenly believe that there real wage wages have fallen and that is why they supply less labor.
Ultimately, this decrease in price level leads to less or reduced output being produced in the short run.
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