This preview shows page 1. Sign up to view the full content.
Unformatted text preview: new equilibrium price and the existing price differ by enough to make it worthwhile to incur the menu costs of changing the price. With prices fixed, firms adjust production to meet the demand for their products. With any increase in aggregate demand, some firms will find it profitable to raise prices while others will find it worthwhile to increase output. So, the SRAS curve is upward-sloping: an increase in the price level leads to an increase in total output. In the long run, all costs are variable so there is no variation in the level of output with the price level. Wages and other resource costs fully adjust to price level changes. Higher costs match higher product prices so profits are unchanged. So, the LRAS is vertical at the level of potential real GDP....
View Full Document
- Fall '09
- Personal Finance