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Chapter 11: 25 (page 292)

Briefly explain the reason for the near-vertical shape of the SRAS curve on its far right.

Short Answer

Expert verified

When all resources are fully utilized, SRAS is vertical, indicating that the output has attained its maximum capacity.

Step by step solution

01

Concept introduction

The SRAS curve depicts the relationship between pricing and aggregate output.

02

Explanation

In the long run, SRAS approaches verticality because all of the economy's resources are fully utilized. The quantity of production cannot be increased more as all resources are fully utilized.

The economy is unable to produce any additional output due to a lack of resources. The resources have been fully exploited, and the output has reached its maximum potential. Even if prices rise, there is no way to boost output; only inflation is possible.

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Most popular questions from this chapter

Economists expect that as the labor market continues to tighten going into the latter part of 2015 that workers should begin to expect wage increases in 2015 and 2016. Assuming this occurs and it was the only development in the labor market that year, how would this affect the AS curve? What if it was also accompanied by an increase in worker productivity?

Suppose concerns about the size of the federal budget deficit lead the U.S. Congress to cut all funding for research and development for ten years. Assuming this has an impact on technology growth, what does the AD/AS model predict would be the likely effect on equilibrium GDP and the price level?

The short run aggregate supply curve was constructed assuming that as the price of outputs increases, the price of inputs stays the same. How would an increase in the prices of important inputs, like energy, affect aggregate supply?

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

Table 11.4 describes Santher's economy.

Price Level
AD
AS
501000250
60950580
70900750
80850850
90800900

a. Plot the AD/AS curves and identify the equilibrium.

b. Would you expect unemployment in this economy to be relatively high or low?

c. Would you expect prices to be a relatively large or small concern for this economy?

d. Imagine that input prices fall and so AS shifts to the right by 150units. Identify the new equilibrium. e. How will the shift in AS affect the original output, price level, and employment?
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