The short-run aggregate supply curve is upward sloping because
A)output prices rise and fall faster than input prices rise and fall, respectively.
B)of the real balance effect.
C)of the substitution-of-foreign-goods effect.
D)of the interest rate effect.

Question

Quizplus · Accepted Answer

The short-run aggregate supply curve is upward sloping because output prices tend to rise and fall faster than input prices. This means that as output prices increase, firms are willing to increase production due to the prospect of higher profits, leading to an increase in aggregate supply in the short-run. Conversely, as output prices fall, firms may reduce production as the prospect of lower profits reduces the incentive to produce, leading to a decrease in aggregate supply in the short-run. Therefore, the upward sloping supply curve reflects the relationship between output price level and the short-run level of aggregate supply.

The Short-Run Aggregate Supply Curve Is Upward Sloping Because