Question

Explain, in your own words, the two reasons why the Aggregate Supply curve (AS) is positively sloped. Please answer in 200 words.

Answer 1

The two reasons why the aggregate supply curve is positively are explained by the sticky price model and sticky wages model:

1. Sticky - price model - Sticky prices are priced of goods and services that do not respond immediately to any condition. This model says, as the producers expect the price to go up, they set their sticky prices high which makes other firms do the same. This leads to increase in actual price. As this happens, producers produce more output which makes the demand go high which again makes the price go high.

2. Sticky - Wage Model - According to this model, as the prices go high, the real wages fall. when real wages fall , labour becomes cheap which then makes firms hire more labor and consequently more output is produced.