3 Macroeconomics LESSON 4 S ACTIVITY 24

UNIT Answer ■ 3 Macroeconomics LESSON 4 ACTIVITY 24 Key An Introduction to Short-Run Aggregate Supply

Part A Why Can the Aggregate Supply Curve Have Three Different Shapes?

Figure 24.1 Possible Shapes of Aggregate Supply Curve

SRAS

L L SRAS L E E E V V V E E E L L L

SRAS E E E C C C I I I R R R P P P REAL GDP REAL GDP REAL GDP

1. Under what conditions would an economy have a horizontal SRAS curve? When there are a lot of unemployed resources or a constant price level as in a recession or depression

2. Under what conditions would an economy have a vertical SRAS curve? AS is vertical when real GDP is at a level with unemployment at the full-employment level and where any increase in demand will result only in an increase in prices. The economy is unable to produce any more goods and services for a sustainable period of time.

3. Under what conditions would an economy have a positively sloped SRAS curve? In this range, resources are getting closer to full-employment levels, which creates upward pressure on prices. The upward pressure on prices is caused by rising costs of doing business. Sticky wages and/ or sticky prices cause the AS curve to be positively sloped. Wages and prices may be slow to adjust, or sticky, if firms or workers lack information.

476 Advanced Placement Economics Teacher Resource Manual © National Council on Economic Education, New York, N.Y. UNIT Answer ■ 3 Macroeconomics LESSON 4 ACTIVITY 24 Key

4. Assume AD increased. What would be the effect on real GDP and the price level if the economy had a horizontal SRAS curve? A positively sloped SRAS curve? A vertical SRAS curve? With a horizontal SRAS curve, an increase in AD results in an increase in real GDP and no change in the price level. With a positively sloped SRAS curve, an increase in AD results in increases in real GDP and the price level. With a vertical SRAS curve, an increase in AD results in no change in real GDP and an increase in the price level.

5. What range of the SRAS curve do you think the economy is in today? Explain. Answer depends on current economic conditions.

Part B What Shifts the Short-Run Aggregate Supply Curve?

Figure 24.2 Shifts in Short-Run Aggregate Supply

A B C L E V E L

E C I R P

REAL GDP

6. Using Figure 24.2, determine whether each situation below will cause an increase, decrease or no change in short-run aggregate supply (SRAS). Always start at curve B. If the situation would cause an increase in SRAS, draw an up arrow in column 1. If it causes a decrease, draw a down arrow. If there is no change, write NC. For each situation that causes a change in SRAS, write the letter of the new curve in column 2. Move only one curve.

Advanced Placement Economics Teacher Resource Manual © National Council on Economic Education, New York, N.Y. 477 UNIT Answer ■ 3 Macroeconomics LESSON 4 ACTIVITY 24 Key

Situation 1. Change in SRAS 2. New SRAS Curve

(A) Unions grow more aggressive; ➞ wage rates increase. A ➞

(B) OPEC successfully increases oil prices. A

energy prices. ➞ C (E) Computer technology brings new efficiency

to industry. ➞ C

(F) Government spending increases. NC

(G) Cuts in tax rates increase incentives to save. NC (H) Low birth rate will decrease the labor force in future. NC (I) Research shows that improved schools have increased the skills of American workers

and managers. ➞ C

Note: (F) and (G) do not affect the aggregate supply curve. They do shift the aggregate demand curve. (H) will not affect aggregate supply for 16 years or more.