Aggregate demand, aggregate supply and inflation - The aggregate supply curve
3 important questions on Aggregate demand, aggregate supply and inflation - The aggregate supply curve
The short-run aggregate supply curve (SRAS) shows:
The relationship between short-run equilibrium output Y, which firms wish to supply, and the rate of inflation pi; the SRAS curve has a positive slope, indicating that inflation and aggregate supply change in the same direction.
Two closely related factors that play an important role in determining the inflation rate are:
- The behaviour of the public's inflation expectations
- the existence of fixed-term wage and price contracts
The positive of the SRAS curve reflects the fact that given the expected rate of inflation, an unanticipated increase in the actual rate of inflation creates a profitable opportunity for firms to increase production. The SRAS curve will shift when:
An unexpected rise in inflation leads to an increase in inflationary expectations (which can also happen as a result of new information about the plans of the central bank) and a revision of nominal wage and contract prices.
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