Question

Draw and explain the aggregate supply curve why does the curve rise more quickly as the level of real GDP rises

Answer 1

At each price level, the total amount of output that firms will produce and sell ie real GDP, is known as aggregate supply.Based on the amount of profit the firms expect to earn ,the firms decide how much to produce.Profits are determined on the price of the outputs the firm sells and the price of the inputs the firms uses to produce like labor , raw materials etc.If the firms in the economy find that prices of what they produce and sell are rising than their cost of production , supply will increase for more profit. In the graph we see that the AS curve is flat in the beginning but rises fast as the level of output in the economy increases.When there is increase in the prices of output and input prices do not increase , then quantity of aggregate supply ie real GDP increases due to opportunity for more profit.