Hey Guys! I\'m stuck on my econ homework and am hoping you can help me out! If y

Question

Hey Guys! I'm stuck on my econ homework and am hoping you can help me out! If you could expain how you do it that would be great!

Thanks in advance!

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 will respond by price level causes the quantity of output supplied to , and firms that rely on catalogs the quantity of output they supply. If enough firms face high costs of adjusting prices, the unexpected decrease in the 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 + ×(Price LevelActual-Price Leve!Expected) = The Greek letter represents a number that determines how much output responds to unexpected changes in the price level. In this case, assume that = $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 rate of output by $2 billion Suppose the natural rate of output is $60 billion of real GDP and that people expect a price level of 100

Explanation / Answer

A According to the sticky-price theorv. the short-run aggregate supplv curve slopes upward because the prices of some prodUcts adjust slowly to economic conditions. Some rms set prices for prolonged periods of time because the; face the high menu costs of frequent price adjustments. If the price level turns out to be lower than people expected, the prices of products from rms with more flexible pricing options will be low compared to the prices of products from rms that face hlgh menu costs. Firms with rigid prices will see their sales decline and will cutback on production.

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