Gradual adjustment of prices and wages to an increase in the aggregate demand curve implies that the aggregate supply curve is:
A) horizontal.
B) vertical.
C) upward sloping but not vertical.
D) downward sloping.

Question

Quizplus · Accepted Answer

The gradual adjustment of prices and wages suggests that there is some upward sloping of the aggregate supply curve. If the aggregate supply curve was completely horizontal, then any increase in demand would lead to an immediate increase in output, without any change in prices or wages. If the aggregate supply curve was completely vertical, then any increase in demand would only lead to an increase in prices, with no increase in output. Therefore, an upward sloping but not vertical aggregate supply curve best fits the scenario of gradual adjustment of prices and wages in response to an increase in aggregate demand.

Gradual Adjustment of Prices and Wages to an Increase in the Aggregate