Question

Describe the two complentary explanations for why aggregate supply curve is positively sloped.

Answer 1

The first explanation is that, with increase in the price level, real wages of the workers decrease though the nominal wage remains same. It makes the real cost of production to decrease with increase in the price level. At this level, firms try to hire more number of workers as they only pay the lower real wage. It helps the firm to maximize the profit. So, the aggregate supply curve becomes positively sloped.

The second explanation is that increase in price of goods & services, lead to the increase in the profitability of the firms. So, aggregate supply curve become positively sloped.