Question

Suppose that workers and firms could always predict next year's price level with perfect accuracy. Under these circumstances, the SRAS curve

a. would be downward sloping because quantity supplied would increase as the price level falls.
b. would be upward sloping because higher price levels would still reduce household wealth and consumption spending
c. would be upward sloping because worker and firm price predictions do not affect the SRAS curve
d. would be the same as the LRAS

Answer 1

The SRAS curve would remain upward sloping even if workers and firms could predict next year's price level with perfect accuracy, because the SRAS reflects short-run production adjustments based on temporary price and wage imbalances, as opposed to the long-run view where these factors do not affect aggregate supply.

Step-by-step explanation:

If workers and firms could always predict next year's price level with perfect accuracy, the short-run aggregate supply (SRAS) curve would not be identical to the long-run aggregate supply (LRAS). Instead, the SRAS curve would still be upward sloping, as it shows a positive relationship between the price level and the level of real GDP in the short run.

This upward slope indicates that when the price level for outputs increases, while the price level of inputs remains fixed during this period, the possibility for additional profits encourages more production.

However, in a situation where price levels are perfectly anticipated, the SRAS curve might appear more vertical than would be the case without such perfect foresight, reflecting movements towards the LRAS curve.

In the long run, the aggregate supply is not affected by the price level, and thus the long-run aggregate supply (LRAS) curve is vertical.

Therefore, the SRAS would not be the same as the LRAS, even with perfect price prediction, because the short run involves, among other things, temporary imbalances between wages and prices that do not occur in the long run.