If a firm gets a higher price, they will make a higher profit by selling more, so quantity supplied increases when price increases. The SRAS curve slopes up for two reasons:
sticky input prices (like wages) and sticky output prices (also called “menu costs”)
.
What is the economic reason why the SRAS curve slopes up quizlet?
What is the economic reason why the SRAS curve slopes up?
The AS curve is drawn using a nominal variable, such as the nominal wage rate
. In the short-run, the nominal wage rate is fixed.
What are the three reasons why the aggregate demand curve is downward sloping?
There are three basic reasons for the downward sloping aggregate demand curve. These are
Pigou’s wealth effect, Keynes’s interest-rate effect, and Mundell-Fleming’s exchange-rate effect
. These three reasons for the downward sloping aggregate demand curve are distinct, yet they work together.
What causes the AD curve to shift down?
The aggregate demand curve tends to shift to the left
when total consumer spending declines
. Consumers might spend less because the cost of living is rising or because government taxes have increased. … The government might decide to raise taxes or decrease spending to fix a budget deficit.
What is the economic reason that the aggregate supply curve or short-run aggregate supply curve slopes up?
The short-run aggregate supply curve is upward sloping
because the quantity supplied increases when the price rises
. In the short-run, firms have one fixed factor of production (usually capital ). When the curve shifts outward the output and real GDP increase at a given price.
What happens when aggregate supply increases?
The aggregate supply curve shifts to the right as
productivity increases or the price of key inputs falls
, making a combination of lower inflation, higher output, and lower unemployment possible.
Why are there two aggregate supply curves?
Like changes in aggregate demand, changes in aggregate supply are not caused by changes in the price level. Instead, they are primarily caused by changes in two other factors. The first of these is a change in input prices. … A second factor that causes the aggregate supply curve to shift is
economic growth
.
What was the wealth effect?
The wealth effect is a
behavioral economic theory suggesting that people spend more as the value of their assets rise
. The idea is that consumers feel more financially secure and confident about their wealth when their homes or investment portfolios increase in value.
What is the aggregate supply curve?
What Is Aggregate Supply? … It is represented by the aggregate supply curve, which
describes the relationship between price levels and the quantity of output that firms are willing to provide
. Typically, there is a positive relationship between aggregate supply and the price level.
Why is long run aggregate supply vertical?
Why is the LRAS vertical? The LRAS is vertical because, in the long-run,
the potential output an economy can produce isn’t related to the price level
. … The LRAS curve is also vertical at the full-employment level of output because this is the amount that would be produced once prices are fully able to adjust.
What factors can increase or decrease aggregate demand?
Aggregate demand can be impacted by a few key economic factors. Rising or falling interest rates will affect decisions made by consumers and businesses.
Rising household wealth
increases aggregate demand while a decline usually leads to lower aggregate demand.
Is curve represent the combination of?
The IS curve represents all combinations of
income (Y) and the real interest rate (r)
such that the market for goods and services is in equilibrium.
WHY IS curve is negatively sloped?
The IS curve has a negative slope because,
as the interest rate increases, desired investment decreases and so does goods market equilibrium output
(with the latter change being larger in absolute value than the former, because of the multiplier effect).
What possible changes can result shift in demand curve?
Factors that can shift the demand curve for goods and services, causing a different quantity to be demanded at any given price, include
changes in tastes, population, income, prices of substitute or complement goods
, and expectations about future conditions and prices.
How do you tell if an economy is in a recessionary gap?
When the aggregate demand and short-run aggregate supply curves intersect below potential output
, the economy has a recessionary gap. When they intersect above potential output, the economy has an inflationary gap.
Is it better to have a higher or lower multiplier effect and why?
With a
high multiplier
, any change in aggregate demand will tend to be substantially magnified, and so the economy will be more unstable. With a low multiplier, by contrast, changes in aggregate demand will not be multiplied much, so the economy will tend to be more stable.
