1)Long-run aggregate supply: Long run is a period in which all the inputs are variable and have enough time to respond to the changes in price level. Long-run aggregate supply is measured with the help of a curve that depicts the relation between price level and the gross domestic product. Nominal wages are flexible in long-run aggregate supply, prices are changes in long-run aggregate supply but output is remained constant.

Slope of long-run aggregate supply is vertical sloping because output that can be produced by a country is not related to the price level in the period of long run. The only thing that matters the output of the economy is the amount of resources it have and how it allocated those resources. Other reason for its vertical slope is that in long, it has been assumed that economy is in full employment and that is why output remains constant. It also assumes that in long run, change in aggregate demand will cause a temporary effect on the total output of the economy.

There is not any circumstances under which LRAS and SRAS will have same slope. This is because the short-run aggregate supply curve is upward sloping due to short term change in demand of goods and services. LRAS and SRAS cannot have same slope because both have different properties and operate in totally different economy.

2)

Aggregate Demand(AD): AD is an economic measurement of the total amount of finished goods produced in an economy. It also expressed as the total amount of money exchanged for those goods and services at a specific price level. AD and GDP are considered equal because GDP tells the total amount of goods and services produced in an economy and AD tells the demand for those goods in an economy. But AD and GDP only equal when in the long run when price levels are fixed. AD considers all consumer goods, capital goods, exports, imports, and government spending.

The AD curve is a downward sloping curve that represents the relation between price and output. Reasons for AD being a downward sloping curve is-

1. Pigou wealth effect: Nominal value is fixed but the real value depends upon the price. Therefore when the price falls our purchasing value increases and we can spend more

2. Keyne's interest rate: The quantity of money demanded is depend on the price of that good. A high price means we need more money to buy that good. So for that, we need more currency to buy that good, which means we keep less money in the bank and which makes it difficult for the bank to give money. Thus results is high-interest rates. Interest increases in AD decreases.

3. Mundell- Fleming exchange rate: So if interest rate increases as the price level fall, domestic investors invest more in our country which will make our country's currency stronger in comaprison to foreign currency. So domestic buyers will buy more of foreign goods because their gods become cheaper now. This will increase imports and which leads to fall in AD.

Short-run aggregate supply curve - SRAS lets us capture how all of the firms in an economy respond to the price stickiness. When prices are sticky SARS will be upward sloping. The SRAS curve shows that a higher price leads to more output

Reasons for SRAS being upward sloping:

1. Sticky Wage model: Wages of the labour is fixed by some union or upper management. So in the short run when prices increase, their wages do not increase immediately. This will reduce the real wage of labour i.e. labour becomes cheaper. So now firms can hire more labours at the same wage level and earn higher profit. Hiring more labours leads to an increase in output

2. Worker misperception model: Here we also consider the labour market. The assumption here is that labour will work more if he gets more wage in real term. Labour can only guess how much he can buy with a given income. Only firms knows how much is the real wage. So if prices increase firms increases there nominal wages, not the actual wages. This will fool the labour in thinking that they are getting a higher real wage, so they start working more, which will lead to more output.

3. Imperfect information model: Here we consider that neither labour nor firms have full information about real wage and nominal wage. Producers are only aware of the price of the good they produce. So they get confused between relative and absolute change in price. A relative increase in price means there is an increase in the price of only their goods which means real wage increases but absolute means price of all goods in the economy increases which means real wage remains constant.

So when there is an absolute increase in prices, producers confuse it with a relative increase in price and thought they are earning more real wage now. And when real wage earned by producers increases there will be an increase in labour supply which will lead to higher output.

4. Sticky price model: There are two scenarios here, first when firms expect there is high price level they keep there sticky price level higher i.e. the price at which they supply. By looking at these other firms also keep a higher price. This will leads to an overall higher price level. Therefore a higher price level increase overall output.

Second, when there is a high output level, there will be a higher demand for that good. And when there is high demand, the price of that good is also high. Therefore firms keep there sticky price level high, which results in a higher overall price level.

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