3.3 Short-Run Aggregate Supply (SRAS)

a. Define (using graphs as appropriate) the short-run aggregate supply (SRAS) curve. b. Explain (using graphs as appropriate) the slope of the SRAS curve and its determinants.

• The short-run aggregate supply (SRAS) curve describes the relationship between the price level and the quantity of goods and services supplied in an economy.
• The SRAS curve is upward-sloping because of sticky wages and prices. [See EK MOD-2.E.1]
• Any factor that causes production costs to change, such as a change in inflationary expectations, will cause the SRAS curve to shift.
• Enduring understanding MOD-2: Economists use the aggregate demand–aggregate supply model to represent the relationship between the price level and aggregate output in an economy and to illustrate how output, employment, and the price level respond to macroeconomic shocks.

Explain (using graphs as appropriate) how movement along the SRAS curve implies a relationship between the price level (and inflation) and unemployment.

• Moving along the SRAS curve, an increase in the price level is associated with an increase in output, which means employment must correspondingly rise. With the labor force held constant, unemployment will fall. So, there is a short-run trade-off between inflation and unemployment. [See EK MOD-3.A.1]
• Enduring understanding MOD-2: Economists use the aggregate demand–aggregate supply model to represent the relationship between the price level and aggregate output in an economy and to illustrate how output, employment, and the price level respond to macroeconomic shocks.