The aggregate quantity of goods and services supplied depends on three factors: labor (L), capital (K), and the state of technology (T).

Y = F (L, K, T)

The aggregate supply curve (AS) represents the relationship between the quantity of goods and services supplied and the price level. It is important to distinguish between long-run aggregate supply and short-run aggregate supply.

The short-run aggregate supply curve typically slopes upward to the right. In the short run, some prices (e.g., rents, wages) are temporarily fixed as the result of prior commitments. Therefore, firms will expand outputs as the price level increases because higher prices will improve profit margins. Short-run equilibrium occurs when the aggregate quantity of goods and services demanded is equal to the aggregate quantity supplied.

The long-run aggregate supply curve is vertical. In the long run, people have sufficient time to alter their behavior to adjust fully to price changes. The sustainable level of output is determined by a nation's resource base, technology, and the efficiency of its institutional factors. The price level has no effect on a nation's long-run aggregate supply. In long-run equilibrium, current output (Y_full) will equal the economy's potential GDP, the economy is operating at full employment, and the actual rate of unemployment will equal the natural rate of unemployment.

Aggregated demand and supply determine the level of real GDP and the price level of a nation.

Practice Question 1

The long-run aggregate supply curve ______

A. is vertical.
B. is horizontal.
C. slopes upward.

Correct Answer: A

Potential GDP is independent of the price level in the long run.

Practice Question 2

An increase in production costs is most likely to shift the ______.

A. AS curve up
B. AS curve down
C. AD curve up

Correct Answer: A

The AS curve shifts up when firms face cost increases that force them to raise prices.

Practice Question 3

Refer to the graph below. The short-run curve in the graph is called a(n) ______.

A. aggregate supply curve
B. potential output curve
C. firm's supply curve

Correct Answer: A

The aggregate supply curve is horizontal in the short run because most U.S. markets are quantity-adjusting markets.

Practice Question 4

Long-term aggregate supply depends on all of the following factors except ______.

A. the quantity of capital
B. the quantity of labor
C. the state of technology
D. price level

Correct Answer: D

Practice Question 5

In the short run, which of the following factors is not fixed?

A. Price level
B. Capital
C. State of technology
D. Labor

Correct Answer: D

Practice Question 6

When the price level rises but the money wage rate and other resource prices remain the same, then the quantity of real GDP supplied ______ and there is a ______ the short-run aggregate supply curve.

A. decreases; a movement along
B. increases; a movement along
C. increases; a rightward shift of

Correct Answer: B

Practice Question 7

In the short run, the unemployment rate ______ the natural unemployment rate.

A. is always above
B. can fall below or rise above
C. is always below

Correct Answer: B

Real GDP can fall below or rise above potential GDP as well.