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Models of Aggregate Supply

Models of Aggregate Supply - Models of Aggregate Supply...

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Models of Aggregate Supply Introduction to Aggregate Supply Models The aggregate supply curve shows the relationship between the price level and output. While the long run aggregate supply curve is vertical, the short run aggregate supply curve is upward sloping. There are four major models that explain why the short-term aggregate supply curve slopes upward. The first is the sticky-wage model. The second is the worker-misperception model. The third is the imperfect-information model. The fourth is the sticky- price model. The following headings explain each of these models in depth. As we move on to explore each of these four models, keep in mind that an upward sloping short run aggregate supply curve means that as the price level rises, output increases. This is the point of each of the following models. Sticky-Wage Model The sticky-wage model of the upward sloping short run aggregate supply curve is based on the labor market. In many industries, short run wages are set by contracts. That is, workers are paid
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