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Answer to Question #54572 in Macroeconomics for jared

Question #54572
Explain the following:
a) Why the long-run aggregate-supply curve is vertical.
b) Three theories for why the short-run aggregate-supply curve is upward-sloping.
Expert's answer
a) the long-run aggregate supply curve is a vertical line. The aggregate real production offered for sale by the business sector is the same at higher price levels as it is at lower price levels. This constant level of aggregate real production is full-employment production.
b) In the short-run, the aggregate supply curve is upward sloping. There are two main reasons why the quantity supplied increases as the price rises:

- The AS curve is drawn using a nominal variable, such as the nominal wage rate. In the short-run, the nominal wage rate is fixed. As a result, an increasing price indicates higher profits that justify the expansion of output.
- An alternate model explains that the AS curve increases because some nominal input prices are fixed in the short-run and as output rises, more production processes encounter bottlenecks. At low levels of demand, large numbers of production processes do not make full use of their fixed capital equipment. As a result, production can be increased without much diminishing returns. The average price level does not have to rise much in order to justify increased production. In this case, the AS curve is flat. Likewise, when demand is high, there are few production processes that have unemployed fixed outputs. Any increase in demand production causes the prices to increase which results in a steep or vertical AS curve.

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