The short- run aggregate supply curve indicates
A)the relationship between the price level and the natural unemployment rate.
B)the relationship between the purchasing power of wages and the quantity of labour supplied by households.
C)the relationship between the quantity of real GDP supplied and the price level when the money wage rate, the prices of other resources, and potential GDP remain constant.
D)the various quantities of real GDP producers supply at different income levels.
E)the relationship between the price level and real GDP demanded by consumers, investors, governments, and net exporters.

Question

Quizplus · Accepted Answer

The short-run aggregate supply curve shows the relationship between the quantity of real GDP supplied and the price level when the money wage rate, the prices of other resources, and potential GDP remain constant. This is because in the short run, firms are often locked into contracts for input prices such as wages, so they cannot easily adjust their costs in response to changes in the price level. As a result, a higher price level will lead firms to supply more output since they can sell it at a higher price without facing higher costs. However, in the long run, input prices and potential GDP can adjust, and the economy returns to the natural rate of unemployment.

The Short- Run Aggregate Supply Curve Indicates