-Refer to the above diagram.Assume that nominal wages initially are set on the basis of the price level P₂ and that the economy initially is operating at its full-employment level of output Q _f.In the short run,an increase in the price level from P₂ to P₃ will: A) change aggregate supply from AS₂ to AS₃. B) increase real output from Q₁ to Q₂. C) change aggregate supply from AS₂ to AS₁. D) increase real output from Q_f to Q₂.

Question

Quizplus · Accepted Answer

In the short run, an increase in the price level from P2 to P3 will lead to an increase in real output from Qf to Q2 due to the upward-sloping short-run aggregate supply curve, as firms respond to higher prices by increasing production.

-Refer to the Above Diagram