Aggregate Supply curve shows the relationship between

Instructions:

1. Aggregate Supply curve shows the relationship between the price level and the real GDP supplied in an economy.

a. Under what circumstances the AS curve will have a flat segment?

b. When an economy has a vertical AS curve?

c. The AS curve is upward sloping in the intermediate region between the horizontal and the vertical segments. What kind of macroeconomic conditions give rise to the upward sloping range?

2. What are automatic fiscal stabilizers? How do these stabilizers stabilize real GDP in the face of AD and AS shocks?

o What is the role of the simple multiplier [ 1/{1 – MPC(1 – t) – m}] in stabilization of the swings in real GDP?

o How the slope of the AD curve affects the stability of real GDP in the presence of AS shocks?

o How the automatic stabilizers depend on the sizes of MPC, t, and m.