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Chapter 24: Q 24. (page 602)

Briefly explain the reason for the near-horizontal shape of the SRAS curve on its far left.

Short Answer

Expert verified

There are various reasons for this shift which we discuss below.

Step by step solution

01

Step 1. Definition

The SRAS (short-run aggregate supply) curve is a curve that shows that if there is an increase in price level and you will be moving along the SRAS, there will be an increase in the amount of real GDP which will be produced in an economy.

02

Step 2. Explanation

When an economy is below its potential the SRAS curve is near horizontal shape on its far left. In this situation unemployment is high, various industries are idle and work on less capacity as compared to past, and a little rise in the price level will have a large increase in production.

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Most popular questions from this chapter

Describe the mechanism by which supply creates its own demand.

How is recession illustrated in an AD/AS model?

If households decide to save a larger portion of their income, what effect would this have on the output, employment, and price level in the short run? What about the long run?

Does Say’s law apply more accurately in the long run or the short run? What about Keynes’ law?

In the AD/AS model, what prevents the economy from achieving equilibrium at the potential output?
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