Session 3 homework - Maxie Formal Assigned Questions Answer...

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Maxie Formal Assigned Questions: Answer at least any three questions in the following assignment drop box. The questions for this session is given individually without sharing with others. 1) Explain why the Aggregate Supply curve becomes increasingly steeply sloped at levels of RGDP near "full employment" and becomes especially steeply sloped beyond "full employment" RGDP (hint: this topic is not discussed in your text... you will need to understand this week's lecture notes to answer this). Aggregate supply is the relationship between the quantity of goods and services supplied and the price level. Because the firms that supply goods and services have flexible prices in the long run but sticky prices in the short run, the aggregate supply relationship depends on the time frame. The vertical aggregate supply curve satisfies the classical dichotomy for it implies that the level of output is independent of the money supply. This level of output is called the full employment level of output. It is the level of output at which the economy’s resources are fully employed or more realistically, at which unemployment is at its natural rate. When the economy is operating at less then full employment that means there are idle resources. The idle resources can be put back to work without raising per unit costs. After all an unemployed worker will be happy to get their jobs back and wouldn’t ask for a pay raise. So output can expand and as long as less than full employment very little pressure for the price level to rise. This implies the economy is in a recession or depression and has excess capacity in production with large amounts of idle capital, labor and other resources. Thus if the economy increases output, price levels do not rise because there is so much unemployment and excess capacity

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