Question

What is the intermediate zone of the SRAS curve? Will a rise in output be accompanied by a rise or a fall in the price level in this zone?

Short answer

In the intermediate zone of the SRAS curve, a rise in output will result in a rise in the price level. However, this increase in the price level will not be as significant as in the Classical zone, since the economy still has some unused capacity or resources that allow it to increase output with moderate increases in the price level.

Step-by-step solution

Understanding the SRAS curve and its zones

The Short-Run Aggregate Supply (SRAS) curve represents the relationship between the quantity of goods and services that firms in an economy are willing to produce and the price level. It is upward sloping because as the price level increases, firms are more willing to supply goods and services. The SRAS curve can be divided into three zones: Keynesian zone, Intermediate zone, and Classical zone.

Identifying the intermediate zone

The intermediate zone of the SRAS curve lies between the Keynesian and the Classical zones. In the Keynesian zone, the SRAS curve is relatively flat, which means that an increase in aggregate demand causes output to increase with little effect on the price level. In the Classical zone, the SRAS curve is steep, indicating that an increase in aggregate demand does not significantly increase output but causes a large increase in the price level. The intermediate zone is where the SRAS curve transitions from being relatively flat to becoming steeper.

Analyzing the relationship between output and price level in the intermediate zone

In the intermediate zone of the SRAS curve, the relationship between output and price level is neither completely flat nor extremely steep. An increase in output in this zone will lead to a rise in the price level, but the rise in the price level is not as significant as in the Classical zone. This implies that the economy has some unused capacity or resources, which allows it to increase output with moderate increases in the price level. However, as the economy approaches its potential output level, the price level will rise faster in response to further increases in output. In conclusion, in the intermediate zone of the SRAS curve, a rise in output will be accompanied by a rise in the price level, but the rise in price level is not as significant as it would be in the Classical zone.