The aggregate supply curve slopes upward when the real wage falls initially as the price level rises.

Question

Quizplus · Accepted Answer

This is consistent with the typical upward sloping shape of the short-run aggregate supply curve, where firms are willing to increase output in response to higher prices up to a point, but eventually face diminishing returns to scale and higher costs that limit further expansion. As the real wage falls initially, firms may find it easier to hire more workers or invest in equipment to produce more goods, but at some point this may lead to shortages or bottlenecks that raise costs and reduce profitability.

The Aggregate Supply Curve Slopes Upward When the Real Wage