In the extended analysis of aggregate supply, the short-run aggregate supply curve is
A) vertical and the long-run aggregate supply curve is horizontal.
B) horizontal and the long-run aggregate supply curve is vertical.
C) upsloping and the long-run aggregate supply curve is vertical.
D) horizontal and the long-run aggregate supply curve is upsloping.

Question

Quizplus · Accepted Answer

In the extended analysis of aggregate supply, the short-run aggregate supply (SRAS) curve is upsloping because in the short run, firms can adjust prices and output, but may face sticky prices or wages. This means that as output increases, firms may need to increase prices in order to cover their costs, leading to a higher level of inflation. On the other hand, the long-run aggregate supply (LRAS) curve is vertical because in the long run, all inputs (including wages) are flexible and fully adjust to changes in output. This means that increases in output do not necessarily lead to higher prices or inflation, but instead reflect actual increases in productivity and potential output.

In the Extended Analysis of Aggregate Supply, the Short-Run Aggregate