Question

Label each of the following descriptions as being either an immediate-short-run aggregate supply curve, a short-run aggregate supply curve, or a long-run aggregate supply curve.

1. A vertical line.

2. The price level is fixed.

3. Output prices are flexible, but input prices are fixed.

4. A horizontal line.

5. An upsloping curve.

6. Output is fixed.

Short answer

1. A long-run aggregate supply curve

2. An immediate short-run aggregate supply curve

3. A short-run aggregate supply curve

4. An immediate short-run aggregate supply curve

5. A short-run supply curve

6. A long-run aggregate supply curve

Step-by-step solution

Explanation for part (a)

When the resources are fully employed at the full employment level, the output cannot be increased anymore. However, the aggregate demand keeps rising. Input and output prices keep growing in the long run. Thus, the aggregate supply curve, in the long run, is a vertical line.

Explanation for part (b)

The price level for input is fixed in the short-run and the immediate short-run. The output price level stays fixed only in the immediate short-run as the demand and supply cannot be changed suddenly. Therefore, a fixed price level indicates the immediate short-run aggregate supply curve.

Explanation for part (c)

The input price level is fixed for the immediate short-run, and short-run as the major costs for firms are wages and salaries, which are selected by prior contracts.Thus, the input prices cannot move.

However, the output prices remain fixed only in the immediate short-run but are flexible and determined by market forces in the short-run and long-run. Therefore, the set input prices and flexible output prices are combined under the short-run aggregate supply curve.

Explanation for part (d)

A horizontal line means that the price level is fixed and only the output is varying. Thus, it is the immediate short-run aggregate supply curve.

Explanation for part (e)

An upsloping supply curve indicates the price level is increasing as the output is rising. The rising price level is for the output. Therefore, the upsloping curve for increasing output with prices is the short-run aggregate supply curve.

Explanation for part (f)

Fixed output occurs when the economy has achieved a full employment level where output cannot be increased anymore. Full employment is reached in the long run situation only. Therefore, the output shows the long-run aggregate output.