751 $
© 2014 Pearson Canada Inc.$
Which of the following increases aggregate supply in the short-run, everything else held
constant?
A) An increase in the price of crude oil
B) A successful wage increase led by workers
C) Expectations of a higher inflation rate
D) A technological improvement that increases worker productivity
Answer: D
Diff: 2 Type: MC Page Ref: 581
Skill: Recall
Objective List: 24.1 Interpret the aggregate demand and supply framework for the determination
of aggregate output and the inflation rate
What is the shape of the long-run aggregate supply curve? Why?
Answer: The long-run aggregate supply curve is vertical. The amount of output that can be
produced by the economy in the long-run is determined by the amount of capital, the amount of
labour supplied at full employment and the available technology. Some unemployment cannot be
eliminated as it is frictional or structural. Thus, full employment is not at zero unemployment but
is rather at a level above zero, at which the demand for labor equals the supply of labour. This
natural rate of unemployment is where the economy gravitates in the long-run. The level of
output produced at the natural rate of unemployment is called the natural rate of output; it is
where the economy settles in the long-run for any price level. Hence the long-run aggregate
supply curve (LRAS) is vertical at the natural rate of output.
Diff: 3 Type: SA Page Ref: 577
Skill: Recall
Objective List: 24.1 Interpret the aggregate demand and supply framework for the determination
of aggregate output and the inflation rate
Explain why the short-run aggregate supply curve has a positive slope.
Answer: Because wages and prices take time to adjust to economic conditions, we say that they
are sticky. The goal of businesses is to maximize profits made on each unit of output. If profit
rises, more output will be produced, and the quantity of output supplied will increase. In the
short-run, costs of many factors that go into producing goods and services are fixed. Wages for
example, are often fixed for periods of time due to labor contracts, and raw materials are often
bought by firms using long-term contracts that fix the price. Since the costs of production are
fixed in the short-run, when the price level rises, the price of a unit of output will rise while the
costs associated with it remain the same, thus increasing profit per unit produced. Firms will
increase production, and the quantity of aggregate output rises as the price level rises in the
short-run, resulting in an upward-sloping aggregate supply curve
Diff: 2 Type: SA Page Ref: 577
Skill: Recall
Objective List: 24.1 Interpret the aggregate demand and supply framework for the determination
of aggregate output and the inflation rate