Figure 28.1 -Consider the Case in Which There Is an Increase in Increase

question 49

Essay

Figure 28.1
-Consider the case in which there is an increase in aggregate demand, and assume that firms in the economy are imperfectly competitive. The increase in aggregate demand shifts the demand curves facing individual firms out. If the firms' wages do not also increase, then firms can increase their profits by raising prices and increasing output. In other words, the response of the overall economy to the aggregate demand increase will be an increase in output and the price level-a positive slope of the short-run AS curve. What is the key assumption in this story that makes it work? Explain.

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