The Quantity Of Output

In the short run, the quantity of output that firms supply can deviate from the natural level of output if the actual price level in the economy deviates from the expected price level. Several theories explain how this might happen. For example, the sticky-price theory asserts that the output prices of some goods and services adjust slowly to changes in the price level Suppose firms announce the prices for their products in advance, based on an expected price level of 100 for the coming year. Many of the firms sell their goods through catalogs and face high costs af reprinting if they change prices. The actual price level turns out to be 90 . Faced with high meniu cost5, the firms that rely on catalog sales choose not to adjust their prices. 5 leles from catalogs will , and firms that rely on catalogs will respond by the quantity of output they supply. If enough firms face high costs of adjusteng prices, the unexpected decrease in the price level causes the quanticy of output supplied to the natural level of output in the short run. Suppose the economy’s short-run aggregate supply. (AS) curve is given by the following equation: Quartity of Output Supphed – Natural Level of Output + a X (Price Level atwi – Price Level pteded) The Greek letter a represents a number that determines how much output responds to unexpected changes in the price level. In this case, assume that
α=$2 The Quantity Of Output

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billor. That is, when the actual price level exceeds the expected price level by 1 , the quantity of output supplied will exceed the natural level of output by
$2
billion. Suppose the natural level of output is
$60
billion of real GDP and that people expect a price level of I00. On the following graph, use the purple ine (oismond symbol) to phot this economy’s forgurun aggreqate supply (LRAS) airve, Then use the orange in segments (square symbol) to piot the economy’s short-run aggregate supply (As) curve at each of the following price kvels; go, 95, 100, to5, and 110 the once level that peopie expected. The Quantity Of Output

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