Please help me with the graph PRICE LEVEL1251201151101051009590858075ASLRAS01030407080 90 10050 60OUTPUT (Billions of dollars)The short-run quantity of output supplied by firms will fall below the natural level of output when the actual price levellevel that people expected.20the price In the short run, the quantity of output that firms supply can deviate from the natural level of output if the actual price level in the economy deviatesfrom the expected price level. Several theories explain how this might happen.riseIFor example, the sticky-wage theory asserts that output prices adjust more quickly to changes in the price level than wages do, in part because oflong-term wage contracts. Suppose a firm signs a contract agreeing to pay its workers $15 per hour for the next year, based on an expected pricelevel of 100. If the actual price level turns out to be 110, the firm's output prices willand the wages the firm pays itsworkers will remain fixed at the contracted level. The firm will respond to the unexpected increase in the price level by increasing the quantity ofoutput it supplies. If many firms face similarly rigid wage contracts, the unexpected increase in the price level causes the quantity of output suppliedto rise above the natural level of output in the short run.Suppose the economy's short-run aggregate supply (AS) curve is given by the following equation:Quantity of Output Supplied = Natural Level of Output + ax (Price Level Actual Price Level Expected)The Greek letter a represents a number that determines how much output responds to unexpected changes in the price level. In this case, assumethat a $2 billion. That is, when the actual price level exceeds the expected price level by 1, the quantity of output supplied will exceed the naturallevel of output by $2 billion.

The sticky wage hypothesis is an economic idea that describes how wages respond slowly to labour…

Answered: PRICE LEVEL 125 120 115 110 105 100 95…

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter12: The Partial Equilibrium Competitive Model

Section: Chapter Questions

Problem 12.12P

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PRICE LEVEL 125 120 115 110 105 100 95 90 85 80 75 + AS LRAS 20 0 10 30 40 70 80 90 100 50 60 OUTPUT (Billions of dollars) The short-run quantity of output supplied by firms will fall below the natural level of output when the actual price level level that people expected. the price