Create a graph for a short-run aggregate supply curve. Use the variable ‘Price Level’ for the vertical axis and ‘Real GDP’ for the horizontal axis.
Create a graph for a short-run
The supply curve represents graphically the supply schedule and it illustrates when there is an increase in the price level, there is also an increase in the real GDP. Aggregate supply measures the total quantity of output produced and sold by firms. The aggregate supply curve shows the response of the aggregate supply to the fluctuations in the price level. The shape of the aggregate supply curve depends upon the flexibility of the wage changes to the changes in the price level. When there is less flexibility in the short-run, then the aggregate supply curve is a flat curve. On the other hand, the aggregate supply curve is steeper when there is high responsiveness of the wages to the changes in the price level.
According to Keynesian economics, in the short-run wages and prices are assumed to be rigid. They do not change immediately with the change in the level of aggregate demand. The reason behind this is, in the short-run production capacity of firms cannot rise immediately. Firms can change only one input factor in the short run, thus, the magnitude of increase in the supply is less than the magnitude of change in aggregate demand at a single point in time. Thus, the aggregate supply curve is upward sloping in the short-run.
The flat slope of aggregate supply implies aggregate output will change more than proportionately to a unit change in the general price level. Inflation refers to the gradual increase in the general price level over a period of time. Therefore, an increase in the general price level implies rising inflation. A flat aggregate supply ensures that, in the case of a 1% increase in inflation, the aggregate output will increase by more than 1%, which will create more employment. Therefore, if the aggregate supply has a very flat slope, a unit increase in inflation will be accompanied by a more than proportionate decrease in unemployment.
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