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True or False: The more flexible wages and prices, the steeper the short-run aggregate...

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lilylee | Student, College Freshman | Salutatorian

Posted June 27, 2013 at 11:15 PM via web

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True or False: The more flexible wages and prices, the steeper the short-run aggregate supply curve. In fact, if prices and wages(and other inputs costs) are perfectly flexible then we are in a 'classical' world, where the short-run aggregate supply curve is vertical.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted June 28, 2013 at 2:07 AM (Answer #1)

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This statement is true.  The more flexible wages (and other costs are) the more nearly vertical the short run aggregate supply curve will be.  If the wages and other costs are completely flexible, the short run aggregate supply curve will be vertical just as classical economists say that the long run aggregate supply curve will be.

In the view of classical economists, the aggregate supply curve will be vertical in the long run.  This is because, in the long run, they believe that wages and other prices are flexible.  If the wages would be flexible in the short term, the short term aggregate supply curve would be vertical as well.  Whenever, for example, aggregate demand drops, the demand for labor will also drop.  Workers will know that this is happening and will accept lower wages in order to keep their jobs.  This will lower prices and bring aggregate demand back into equilibrium with aggregate supply at the previous level of output. 

Thus, this statement is true and the short run aggregate supply curve would be vertical if wages and other costs were perfectly flexible.

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