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Why the slope of the AS curve matter when the AD curve shifts ? Review the...

Why the slope of the AS curve matter when the AD curve shifts ? Review the following formula between price ( P) and GDP ( Y) ; where s= the percentage of firms under sticky pricing. When s increases ( decreases) , what would happen to the P and Y ?

P=EP+[(1-s)a]/s(Y-Y)

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Answer #1

Slope of AS curve has a large impact on how prices and GDP are affected as AD shifts.

Slope of AS is nothing but the responsiveness of supply curve to change in market price as AD changes.

When AS is steeper in shape, a rightward shift in AD curve leads to a large increase in price or inflation but smaller increase in GDP

On the other hand, when AS is flat, a rightward shift in AD curve leads to a large increase in output, while inflation in not affected much.

Thus, slope of AS curve is of utmost importance when analysing changes in AD curve

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An increase in s will reduce P while a decrease in s will increase P

However, impact on Y would be opposite.

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