7. Why the aggregate supply curve slopes upward in the short run In the short run, the quantity of output supplied by firms can deviate from the natural level of output if the actual price level deviates from the expected price level in the economy. A number of theories explain reasons why this might happen. For example, the sticky-wage theory asserts that output prices adjust more quicily to changes in the price level than wages do, in part because of long-term wage contracts. Suppose a firm signs a contract agreeing to pay its workers $15 per hour for the next year, based on an expected price level of 100 . If the actuai price level turns out to be 90 , the firm's output prices will remain fixed at the contracted level. The firm will respond to the unexpected decrease in the price level by supplies. If many firms face similarly rigid wage contracts, the unexpected decrease in the price level causes the quantity of output supplied to the natural lovel of output in the short run. Suppose the econemy's short-run aggregate supply (AS) curve is given by the followitig equation: The Greek letter a represents a number that determines how much output responds to unexpected changes in the price level, In this case, assume that n i $2 billion. That is, when the actual price level exceeds the expected poice level by 1 , the quantity of output supplied will exceed the natural level of output by $2 billion. The Greek letter represents a number that determines how much output responds to unexpected changes in the price Invel. In this case, sssumi that =$2 billion. That is, when the actual price level exceeds the expected price level by 1 , the quantity of output supgiled will oxceed the naturai level of output by $2 billion. Suppose the natural level of output is $50 billion of real GDP and that people expect a price level ot 105. Jn the following graph, use the purple line (diamond symbol) to plot this economy's long-run aggregate supply (LRAS) curve. Then use the orange line segments (square symbol) to plot the economy's short-run aggregate suppiy (AS) curve at each of the following price levels: 95 , 100, 105, 110, and 115 . The short-run quantity of output supplied by firms will fall short of the natural level of output when the actual price level the price level that people expected