Question

1. Define aggregate supply (AS) and explain how it differs in the immediate short run, the short

run, and the long run  (what are the key assumptions about wages and prices in each of those cases?)  

Answer 1

Ans. Aggregate supply is the total supply of goods and services that the firms in an economy plans to sell in a specific time period.

Due to the assumption that both the input prices and output prices are fixed in the immediate short run, the aggregate supply curve is horizontal in the immediate short run.

In the short run, the aggregate supply curve is upward sloping. The nominal wage rate is fixed. Aggregate supply curve is upward sloping in the short run because some nominal input prices are fixed in the short run and as output rises, more production processes encounter bottlenecks.

In the long run the aggregate supply curve is vertical which tells that changes in the aggregate demand only temporarily changes the economy's total output. In the long run, only capital, labor and technology affect the aggregate supply since everything else in the economy is assumed to be optimally used.