What is happening at the horizontal section of aggregate supply (AS)?

Question

BlackTom AI · Accepted Answer

In the horizontal portion of the Keynesian short-run aggregate supply (AS) curve, firms can expand real output without upward pressure on the overall price level, so total output can increase without increasing the price level.

1. Relevant knowledge points and concepts
- Aggregate supply (AS) shows the relationship between the overall price level and total real output (GDP) firms are willing to produce.
- In the Keynesian framework the short-run AS has three segments: a horizontal (flat) portion at low output, an upward-sloping intermediate portion, and a vertical portion at full employment.
- Price and wage rigidity (sticky prices/wages) and excess capacity/unemployed resources characterize the horizontal section, making AS effectively perfectly elastic with respect to price.

2. Step-by-step reasoning
- At low aggregate demand, many resources (labor and capital) are idle and unemployment is high.
- Wages and input prices do not fall (are sticky), so firms can hire more workers and use idle capacity without needing to raise prices to cover higher costs.
- An increase in aggregate demand therefore leads firms to increase production using idle resources rather than bidding up prices.
- Because input costs remain stable, the overall price level stays constant while output rises.

3. Calculations/intermediate steps
- No numerical calculation is required. The logical intermediate steps: idle resources + sticky prices → firms increase quantity supplied when demand rises → price level remains unchanged while output increases.

4. Why the correct answer is correct
- The phrase “total output can increase without increasing the price level” exactly describes perfect price elasticity of AS in the horizontal region: output is demand-determined while prices are fixed, so output changes do not change the price level.

5. Why other options are incorrect
- “There is no spare production capacity” contradicts the horizontal segment, which requires spare capacity to expand output.
- “There are few unused resources” is also the opposite of the reality in the horizontal section, where many unused resources exist.
- “All of these” cannot be correct because two options are false.

6. Conclusion
- Therefore the correct choice is “total output can increase without increasing the price level,” which matches the provided answer.

What is happening at the horizontal section of aggregate supply (AS)?Single choice

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