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Behavior of Short Run Aggregate Supply Curve

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Explain why the Aggregate Supply curve becomes increasingly steeply sloped at levels of RGDP near "full employment" and becomes especially steeply sloped beyond "full employment" RGDP

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Solution Summary

The problem illustrates how the SAS behaves in a typical economy and why does the SAS curve slope so steeply up once it crosses the LAS curve, or the potential output. It explains the behavior of wages and other prices as the economy produces beyond its potential.

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The short-run aggregate supply curve depends on the money wages in the economy. Once it crosses the full employment equilibrium the money wage rises very steeply, and hence the SAS rises very steeply.

One way to look at it is this. There ...

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