In an economy where nominal incomes adjust equally to changes in the price level, we would expect the long-run aggregate supply curve to be:
A) vertical.
B) horizontal.
C) unit elastic.
D) negatively sloped.
E) positively sloped.

Question

Quizplus · Accepted Answer

If nominal incomes adjust equally to changes in the price level, then real incomes (inflation-adjusted) will remain the same regardless of changes in the price level. In this case, firms' production decisions will not be affected by changes in the price level, as they will still receive the same real value for their output. As a result, the long-run aggregate supply curve would be vertical, indicating that output is fixed in the long run regardless of changes in the price level.

In an Economy Where Nominal Incomes Adjust Equally to Changes