What does modern Keynesian analysis assume about the short-run aggregate supply curve?

Modern Keynesian analysis assumes that the short-run aggregate supply curve is upward sloping. This means that as the overall price level in an economy increases, the quantity of goods and services that firms are willing to produce also rises, all else being equal. This relationship reflects the idea that in the short run, prices of some inputs, such as wages, may be sticky or slow to adjust. As a result, when demand conditions improve and prices rise, businesses can generate increased output by employing more resources or increasing the intensity of their existing resources.

This concept is important because it highlights how changes in demand can affect real output and employment in the short term, which contrasts with the long-run aggregate supply curve that is typically considered to be vertical, indicating that output is determined by factors like technology and resources rather than price levels. Understanding the upward sloping nature of the short-run aggregate supply curve allows economists and policymakers to analyze the dynamic interactions between aggregate demand and supply, particularly in the context of managing economic cycles and implementing fiscal or monetary policy to stabilize the economy.