6. Why the aggregate supply curve slopes upward in the short run In the short ru

Question

6. Why the aggregate supply curve slopes upward in the short run In the short run, the quantity of output that firms supply can deviate from the natural rate of output if the actual price level in the economy deviates from the expected price level. Several theories explain how this might happen For example, the sticky-price theory asserts that the output prices of some goods and services adjust slowly to changes in the price level. Suppose firms announce the prices for their products in advance, based on an expected price level of 100 for the coming year. Many of the firms sell their goods through catalogs and face high costs of reprinting if they change prices. The actual price level turns out to be 90. Faced with high menu costs, the firms that rely on catalog sales choose not to adjust their prices. Sales from catalogs will fall and firms that rely on catalogs will respond by _reducing the quantity of output they supply. If enough firms face high costs of adjusting prices, the unexpected decrease in the price level causes the quantity of output supplied to fall below ? the natural rate of output in the short run. Suppose the economy's short-run aggregate supply (AS) curve is given by the following equation: Quantity of Output Supplied = Natural Rate of Output-ax(Price Level Actual-Price Levelexpected)

Explanation / Answer

All your answers are correct except the last blank.

The short-run quantity of output supplied by firms will rise above $ 60 billions of dollars when actual price level will be greater than the expected price level. In the diagram it is clearly shown that, quantity is greater than $ 60 when actual price is above $ 100 i.e. expected price level.

So, answer should be falls above the price level that people expected.

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