Based on the equation Upper Y equals Upper Y Superscript Upper P Baseline plus a

Question

Based on the equation Upper Y equals Upper Y Superscript Upper P Baseline plus a left parenthesis Upper P minus Upper P Superscript e Baseline right parenthesis?, ?why, in the new classical view?, is the? short-run aggregate supply curve positively? sloped Pick the correct answer below:  

A. the component? a, which is always? positive, is solely responsible for the upward slope of the AS curve.

B. firms can distinguish changes in the relative prices of their products from changes in the price? level, implying the actual price level will equal the expected price level.

C. with Upper P equals Upper P Superscript e?, the second term of the equation equals zero and the aggregate quantity of output supplied equals potential GDP.

D. for a particular expected price? level, Upper P Superscript e?, an increase in the actual price? level, P, increases the value of the second term in the aggregate supply? equation, thereby raising the aggregate quantity of output supplied.

Explanation / Answer

The answer will be D. The short run aggregate supply curve is positively slope because the expected price level of last period increases the actual price level. As a result of rise in actual price level the term( P- Pe ) is positive and the aggregate supply positively related with domestic price level. As domestic actual price level increases quantity of output supplied increases.

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