Which of the following models explain(s) the upward-sloping aggregate supply curve in the short-run?
Select all that apply.
GATE 2023 Question 54: AD-AS model
Answer and worked solution
Answer: (A) and (B) and (C)
Macroeconomics textbooks (following Mankiw's standard treatment) present three classic models that each derive an upward-sloping short-run aggregate supply curve through a different microfoundation:
(A) Sticky-wage model — nominal wages are slow to adjust, so unexpected price changes alter real wages and hence labor demand/output in the short run. Correct.
(B) Worker-misperception model (Friedman-Phelps) — workers temporarily misperceive real wages due to incomplete information about the price level, leading to short-run output deviations. Correct.
(C) Imperfect-information model (Lucas) — individual suppliers can't immediately distinguish whether a price change is relative or general, leading to short-run supply responses to price surprises. Correct.
(D) Solow model is a long-run growth model explaining capital accumulation and steady-state output — it has nothing to do with deriving the short-run AS curve's slope. Incorrect in this context.
Therefore the correct answers are (A), (B), and (C).
The trap: A;B;C;D
The Solow model is a very commonly studied macro model, and students who are pattern-matching 'famous macro models' rather than specifically recalling which models pertain to short-run AS derivation may include it by default, missing that it's a long-run growth framework entirely outside this question's scope.
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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Question from the GATE 2023 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.