In the short run, the quantity of output that firms supply can deviate from the natural rate 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 of reprinting if they change prices. The actual price level turns out to be 90. Faced with high menu costs, the firms that rely on catalog sales choose not to adjust their prices. Sales from catalogs will _______(Remain the same/fall/rise), and firms that rely on catalogs will respond by _______ (Increasing/Reducing) the quantity of output they supply. If enough firms face high costs of adjusting prices, the unexpected decrease in the price level causes the quantity of output supplied to ______ (Fall below/Rise above) the natural rate of output in the short run.Suppose the economy's short-run aggregate supply (AS) curve is given by the following equation:Quantity of output supplied = Natural Rate of output + a x (Price level (actual) - Price level (expected))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 a= $2 Billion. That is, when the actual price level exceeds the expected price level by 1, the quantity of output supplied will exceed the natural rate of output by $2 billion. Suppose the natural rate of output is $60 billion of real GDP and that people expect a price level of 100.The short-run quantity of output supplied by firms will rise above the natural rate of output when the actual price level ____ (rises above/falls below) the price level that people expected.
1 answer:
Answer:
1. Rise
2. Reducing
3. Fall below
4. Rises above
Explanation:
1. Sales from catalogues will fall because people will demand less as a result of the catalogue price being higher than the actual price.
2. As the rules of Supply and Demand opine, the Catalogue companies will have to reduce supply in response to a decrease in demand.
3. The natural output quantity will be more than the output supplied. have attached a graph and a table to show an example using the figures.
4. The short-run quantity of output supplied by firms will rise above the natural rate of output when the actual price level rises above the price level that people expected as shown by the graph.
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