The short-run aggregate supply curve is upsloping because higher price levels
A) lower interest rates and encourage ﬁrms to invest and produce more.
B) create incentives to expand output when resource prices are unresponsive to price-level changes.
C) encourage importation of foreign goods.
D) create an expectation among producers of still higher price levels.

Question

Quizplus · Accepted Answer

In the short-run, resource prices are fixed, so higher price levels provide an incentive for firms to expand output and increase profits. This is known as the sticky wage theory of supply, which states that firms are willing to expand output when prices are rising faster than input costs. Therefore, the short-run aggregate supply curve is upsloping. Option A is incorrect because interest rates are determined by monetary policy and not affected by price levels. Option C is incorrect because higher price levels discourage imports and encourage exports. Option D is incorrect because producers may have different expectations about future price levels.

The Short-Run Aggregate Supply Curve Is Upsloping Because Higher Price