Consider an economy with aggregate production Y=αK+βL, α,β>0, K fixed in the short run. Competitive producers take the nominal wage W and price P as given and choose labour to maximize profit, generating labour demand. Labour supply is LS=−γ+δW/P, with γ,δ>0; there is perfect information about P and W. The labour market will clear if and only if
Assume the parametric condition of the previous question holds and the nominal wage is fixed. The short run aggregate supply schedule, with P on the vertical axis and Y on the horizontal axis, will look as follows:
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Setup, from Q23 of the paper: Consider an economy with aggregate production Y=α K+β L, α,β>0, K fixed in the short run. Competitive producers take the nominal wage W and price P as given and choose labour to maximize profit, generating labour demand. Labour supply is L^S=-γ+δ W/P, with γ,δ>0; there is perfect information about P and W. The labour market will clear if and only if Assume the parametric condition of the previous question holds and the nominal wage is fixed. The short run aggregate supply schedule, with P on the vertical axis and Y on the horizontal axis, will look as follows: (A) for high values of P horizontal; for some mid-range values of P downward sloping; for low values of P horizontal again (B) for high values of P horizontal; for some mid-range values of P upward sloping; for low values of P horizontal again (C) for high values of P vertical; for some mid-range values of P downward sloping; for low values of P vertical again (D) for high values of P vertical; for some mid-range values of P upward sloping; for low values of P vertical again
Also written as: Setup, from Q23 of the paper: Consider an economy with aggregate production Y=alpha K+beta L, alpha,beta>0, K fixed in the short run. Competitive producers take the nominal wage W and price P as given and choose labour to maximize profit, generating labour demand. Labour supply is L^S=-gamma+delta W/P, with gamma,delta>0; there is perfect information about P and W. The labour market will clear if and only if Assume the parametric condition of the previous question holds and the nominal wage is fixed. The short run aggregate supply schedule, with P on the vertical axis and Y on the horizontal axis, will look as follows:
AD-AS model has come up 59 times in 7 exams since 2004.
What this question tests
This question is on Keynesian and short-run aggregate supply, part of AD-AS model in Macroeconomics.
Why output responds to demand in the short run: sticky wages and prices, wage floors and upward-sloping supply.
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