Which of the following best describes why the aggregate supply curve slopes upward?
A) When actual output exceeds potential, firms struggle to keep production in line with the high demand. Firms therefore raise their prices by more than the usual amount in an attempt to cover increased production costs.
B) When actual output exceeds potential, firms have an easy time keeping production in line with the high demand. Firms therefore lower their prices by more than the usual amount in an attempt to cover increased production costs.
C) When actual output exceeds potential, firms struggle to keep production in line with the high demand. Firms therefore lower their prices with decreased production costs.
D) When actual output falls below potential, firms easily keep production in line with the high demand. Firms therefore raise their prices by more than the usual amount in an attempt to cover increased production costs.
E) None of these answers is correct.

Question

Quizplus · Accepted Answer

The upward slope of the aggregate supply curve reflects the relationship between the price level and the quantity of output that firms are willing to produce. As the price level rises, firms have an incentive to increase production and expand capacity. However, there are limits to their ability to do so, such as resource constraints and diminishing returns to scale. As actual output exceeds potential, firms must incur additional costs to increase production, including overtime pay, hiring new workers, and investing in new equipment. These higher costs are reflected in an upward sloping supply curve, as firms will only be willing to produce more at higher prices to cover these added costs.

Which of the Following Best Describes Why the Aggregate Supply