Answer Happy

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 level 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 misperceptions theory asserts that changes in the price level can temporarily mislead firms about what is happening to their output prices. Consider a soybean farmer who expects a price level of 100 in the coming year. If the actual price level turns out to be 90, soybean prices will and if the farmer mistakenly assumes that the price of soybeans declined relative to other prices of goods and services, she will respond by the quantity of soybeans supplied. If other producers in this economy mistake changes in the price level for changes in their relative prices, the unexpected decrease in the price level causes the quantity of output supplied to level of output in the short run. the natural Suppose the economy's short-run aggregate supply (AS) curve is given by the following equation: Quantity of Output Supplied Natural Level of Output + ax (Price Level Atal-Price Level Expected The Greek letter a represents a number that determines how much output responds to unexpected changes in the price level. In this case, assume that a= $2 billion. That is, when the actual price level exceeds the expected price level by 1, the quantity of output supplied will exceed the natural level of output by $2 billion. Suppose the natural level of output is $50 billion of real GDP and that people expect a price level of 100. Window Win

Quantity of Output Supplied = Natural Level of Output + ax (Price Level Actual-Price Level Expected) The Greek letter a represents a number that determines how much output responds to unexpected changes in the price level. In this case, assume that a $2 billion. That is, when the actual price level exceeds the expected price level by 1, the quantity of output supplied will exceed the natural level of output by $2 billion. Suppose the natural level of output is $50 billion of real GDP and that people expect a price level of 100. On the following graph, use the purple line (diamond symbol) to plot this economy's long-run aggregate supply (URAS) curve. Then use the orange line segments (square symbol) to plot the economy's short-run aggregate supply (AS) curve at each of the following price levels: 90, 95, 100, 105, and 110.

PRICE LEVEL 125 120 115 110 105 100 95 90 65 8 10 15 0 10 20 30 40 50 60 70 OUTPUT (Billions of dollars) 80 8 50 100 AS LRAS The short-run quantity of output supplied by firms will rise above the natural level of output when the actual price level level that people expected. the price