Question : In the short run, the aggregate supply curve is:

Option 1: Vertical
   

Option 2: Horizontal
    

Option 3: Upward-sloping

   

Option 4: Downward-sloping

Correct Answer: Upward-sloping

Solution : The correct answer is (c) upward-sloping.

The aggregate supply (AS) curve represents the relationship between the overall price level in the economy and the total quantity of goods and services that firms are willing to produce and supply. In the short run, the aggregate supply curve is typically upward-sloping, indicating a positive relationship between the price level and the quantity of output supplied.

There are a few reasons why the short-run aggregate supply curve slopes upward:

1. Sticky Wages: In the short run, many wages and input prices are relatively inflexible or "sticky." This means that they do not adjust immediately in response to changes in the overall price level. As a result, when the price level rises, firms experience relatively lower production costs, leading to increased profitability and higher output levels.

2. Unused Capacity: In the short run, firms may have unused production capacity or resources that can be utilized to increase output without significant adjustments to their fixed factors of production. As the price level rises, firms are motivated to increase production and utilize their unused capacity to meet the increased demand.

3. Price-Output Adjustment: In the short run, firms may adjust their output levels more easily than they can adjust prices. As a result, when the price level increases, firms can respond by increasing their production and output without immediately raising prices.