The Slope of Aggregate Supply

Aggregate supply is the relationship between the average price level and the real gross national produce that businessmen want to offer for sale -- or, to put it another way, it is the relation between growth of production and rising price levels. A key question is: what is the slope of the aggregate supply curve? It might be upward sloping, or it might be vertical, as shown in the following diagram:

Figure 1: The Slope of Aggregate Supply

If the aggregate supply curve is upward sloping, it means that a higher price level will bring forth more production -- or, conversely, that faster growth of production implies faster inflation. Many people believe this is so -- including many economists and the governors of pretty nearly every central bank, including the Federal Reserve System. This is why the Federal Reserve (and the other central banks) sometimes take steps to restrain production, by raising interest rates -- they are concerned that, if they do not, more inflation will occur.

However, the aggregate supply curve might be vertical. That would mean that production is unrelated to the price level, or, equivalently, that inflation and growth of production are unrelated.

Vertical Aggregate Supply