Aggregate Supply worksheet

Aggregate Supply: answer key

1. 1. (B) SRAS slopes upward because wages and input costs are sticky in the short run. When the overall price level rises, firms get more revenue per unit but labor costs remain locked in via contracts and prior agreements. Real profit margins expand, so firms produce more. Option A contradicts the sticky wage theory that gives SRAS its slope. Option D describes what shifts LRAS over time, not what causes SRAS to slope upward.

2. 2. (C) Higher wages raise production costs across the economy, shifting SRAS left. This is a classic cost-push shock. Option A lowers input costs and shifts SRAS right. Option B boosts productivity and shifts SRAS right. Option D lowers costs for firms and shifts SRAS right. Only the wage increase pushes costs up system-wide.

3. 3. (B) LRAS is vertical because long-run output depends entirely on real resources: the labor force, capital stock, and technology. Once wages and prices have fully adjusted, the price level no longer matters. If everything doubled overnight, the same workers would still show up with the same machines to produce the same output. Option A gets it backwards; in the long run, wages and prices are fully flexible, not sticky. Option C describes a specific adjustment process, not why LRAS is vertical.

4. 4. (B) Output below potential means the economy has a recessionary gap: unemployment sits above the natural rate and many workers who want jobs cannot find them. Option A describes the opposite situation, where output exceeds potential. Option C describes equilibrium on LRAS itself. Option D combines a recessionary gap with supply-side price pressures, which happens in specific supply shocks but isn't the general definition of producing below potential.

5. 5. (B) In a recessionary gap, excess unemployment gradually pushes wages down. Lower wages reduce firms' production costs, and SRAS shifts right. Output rises back toward potential GDP, and the price level falls. Classical economists argue this is the primary self-correction mechanism, while Keynesians counter that wages are very sticky downward, so this process can take years. Option A describes adjustment from an inflationary gap, which is the opposite scenario.

6. 6. (B) Higher oil prices raise production costs for virtually every industry because oil touches transportation, manufacturing, agriculture, and chemicals. SRAS shifts left, output falls, and the price level rises. This is the classic stagflation scenario that the 1973 OPEC embargo produced. Option C is wrong because input costs absolutely affect SRAS: the whole point of the curve is how production costs influence total supply. Option D violates basic supply curve logic; a leftward SRAS shift raises prices, not lowers them.

7. 7. (B) Sticky wage theory is one of the standard AP Macro explanations for an upward-sloping SRAS. Contracts lock wages in for periods of time, often months or years. When the price level rises, firms' revenue per unit increases while wages stay flat, expanding real profit margins. Firms respond by producing more. Option A rejects the premise of sticky wage theory entirely. Option D overstates the role of unions; sticky wages happen through ordinary employment contracts, not just collective bargaining.

8. 8. (C) LRAS shifts only when the economy's real productive capacity changes. Better technology lets workers produce more with the same hours, pushing potential GDP up. Option A shifts AD, not LRAS. Option B is a temporary shock that affects SRAS but leaves LRAS alone. Option D also shifts AD. Everything that shifts AD leaves LRAS untouched in this framework.

9. 9. (A) In an inflationary gap, the tight labor market drives wages up. Higher wages raise production costs, so SRAS shifts left. Output returns to potential GDP but the price level ends up permanently higher than it started. Option B has the wage movement backwards. Option D ignores the built-in correction mechanism that eventually closes the gap, even if policy intervention would speed things up.

10. 10. (B) A leftward SRAS shift pulls output down and pushes prices up. A rightward AD shift pulls output up and pushes prices up. The two effects point in opposite directions on output, so the net change in real GDP depends on the relative sizes of the shifts, making it ambiguous. But both shifts push the price level in the same direction, so inflation is unambiguous. This is a classic trap on AP FRQs asking about combined shifts; the correct move is to identify which variables are ambiguous and which are definite.

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