Which of the following explains why higher prices in the goods and services market will lead to an upward sloping short-run aggregate supply curve?
A) The higher prices will temporarily improve profit margins because many of the cost components of firms will be fixed in the short run.
B) The higher prices will reduce the purchasing power of the fixed quantity of money and, thereby, stimulate additional output.
C) The higher prices will expand the economy's resource base and, thereby, stimulate additional output.
D) The higher prices will improve technology and, thereby, stimulate additional output.

Question

Quizplus · Accepted Answer

In the short run, many of the cost components of firms are fixed, such as labor contracts and lease agreements. Therefore, when prices rise, the increased revenue can temporarily improve profit margins, providing an incentive for firms to increase output and causing the short-run aggregate supply curve to slope upwards.

Which of the Following Explains Why Higher Prices in the Goods