Question

The economy is at point a in the accompanying diagram. Suppose that the aggregate price level rises from p1 to p2. How will aggregate supply adjust in the short run and in the long run to the increase in the aggregate price level? Illustrate with a diagram.

Answer 1

In the short run, the SRAS curve will shift to the left, while in the long run, the LRAS curve will shift to the right in response to an increase in the aggregate price level.

Step-by-step explanation:

When the aggregate price level rises, the aggregate supply (AS) curve will adjust in the short run and in the long run.

In the short run, an increase in the aggregate price level will cause the short-run aggregate supply (SRAS) curve to shift to the left. This is because firms will initially respond to higher prices by increasing production, but they may face limitations such as capacity constraints or higher input costs.

In the long run, however, the aggregate supply curve is determined by factors such as technology, capital stock, and labor force. As firms adjust their production processes and expand their capacity over time, the long-run aggregate supply (LRAS) curve will shift to the right to accommodate the higher aggregate price level.

Overall, in the short run, the SRAS curve will shift to the left, while in the long run, the LRAS curve will shift to the right in response to an increase in the aggregate price level.