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True or False: One reason that the short-run aggregate supply curve slopes upward is...

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lilylee | Student, College Freshman | Salutatorian

Posted June 27, 2013 at 11:10 PM via web

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True or False: One reason that the short-run aggregate supply curve slopes upward is due to the 'stickiness' of input prices relative to output prices. we saw this in plastering example when we let output prices rise and kept nominal wage constant. This being the case, the firm's profit maximizing input rises in price, all else constant.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted June 28, 2013 at 2:17 AM (Answer #1)

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Of course, we are not able to know about the example that your class did of the plastering.  However, assuming that you have accurately described the plastering example, this statement should be true.  One of the major reasons why the short range aggregate supply curve slopes upward (rather than being vertical) is that wages are sticky.

When prices go up, wages typically do not do the same.  Often, wages are determined by contracts that have been made between unions and employers.  Therefore, wages do not rise when prices rise.  When prices rise, firms are happy.  They are able to sell their products for more money.  At the same time, wages have not risen so the firms are making more profit.  Therefore, they will want to supply more of the products.  This will cause them to hire more workers.  In this case, as prices rise, so will the aggregate quantity supplied.   If the aggregate quantity supplied rises with the price level, we have a short term aggregate supply curve that slopes upward.

For this reason, the statement that you have given is true.

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