The positive relationship between short-run aggregate supply and the price level indicates that, in the short run,
A) firms produce more output as the price level falls.
B) the money wage rate increases when moving along the short-run aggregate supply curve.
C) firms produce more output as the price level rises.
D) lower price levels are more profitable for firms.

Question

Quizplus · Accepted Answer

According to the upward sloping short-run aggregate supply curve, as the price level increases, firms are willing and able to produce more output as they can earn higher profits. Conversely, as the price level decreases, firms reduce their output due to lower profits. Therefore, the positive relationship between short-run aggregate supply and the price level implies that firms produce more output as the price level rises.

The Positive Relationship Between Short-Run Aggregate Supply and the Price