Ch.17 ADAS Flashcards
1
Q
Why AD is downward sloping?
A
As the price level increases, the demand for money increases so as the real interest rate will increase. The real production cost will also then increase. The investment expenditure and consumption will decrease so as the real output.
2
Q
Why SRAS is upward sloping?
A
This is because of sticky wage effect. When price level increases, the adjustment of input prices is imperfect due to the longer contracts of inputs, so the real production cost decreases. Firms are profitable to produce more output, so real output increases.
