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Short-Run Supply Curves Slope Upward why? Answer: MC curve begins to slope upward as Q grows larger. Because the MC curve is the Supply Curve, Supply Curves also begin to slope upward at Q grows larger.

How do prices, real output, and unemployment behave as the economy responds to a change in aggregate demand? Answer: Beginning from a state of long run equilibrium, an increase in real aggregate demand will, in the short run, because the economy to move up and to the right along its short run aggregate supply curve. As it does so, the prices of final goods will rise, a positive output gap will develop as real output rises above its natural level, and unemployment will fall below its natural rate. After a time, the expected level of input prices will begin to rise as a result of the increases that have taken place in the prices of final goods. As that happens, the economy will move up and to the left along the aggregate demand curve, assuming no further shift in that curve. The price level of final goods will continue to rise, real output will fall back toward its natural level, and unemployment will rise back toward its natural rate. If, after the economy reaches its new equilib...

What are the sources of shifts in the aggregate supply curves? Answer: At the intersection of the long and short run aggregate supply curves, the price level of final goods and the expected level of input prices are equal. An increase (or decrease) in the expected level of input prices thus will cause the short run aggregate supply curve to shift up (or down) along the long run aggregate supply curve. The location of the long run aggregate supply curve is determined by the natural level of real output. An increase in natural real output resulting from improved technology or greater availability of productive resources will cause a rightward shift in the long run aggregate supply curve.

What are the conditions that determine the slopes of the short and long run aggregate supply curves? Answer: An aggregate supply curve shows the relationship between the quantity of real output supplied (that is, real domestic product) and the average price level of final goods. The slope of the curve depends on what we assume about the way firms expect changes in the prices of final goods to affect input prices. In the long run, it is reasonable to expect input prices to adjust proportionally to changes in the prices of final goods. In that case, firms have no incentive to increase or decrease output, so the long run aggregate supply curve is a vertical line drawn at the economy's natural level of real output. In the short run, actual and expected input prices adjust only gradually to changes in the prices of final goods. Thus, in the short run, firms find it worthwhile to increase both output and prices in response to an increase in demand.

What are some sources of shifts in the aggregate demand curve? Answer: Movements along the aggregate demand curve are associated with changes in the price level of final goods. Changes in other conditions can cause shifts in the curve. Among the sources of shifts are changes in consumer or business expectations, changes in policy regarding government purchases, taxes, and money; and changes in the world economy. Because of the multiplier effect, an initial $1 change in any of the components will cause the curve to shift to the right or left by more than $1.

What are the conditions that determine the slope of the aggregate demand curve? Answer: The aggregate demand curve shows the relationship between real planned expenditure on final goods and the average price level of final goods. The curve has a negative slope because each of the components of real aggregate demand--consumption, planned investment, government purchases, and net exports--varies inversely with the price level.