Consider the following short run aggregate supply equation: Y = $\hat Y$ + b (P - Pᵉ),where Y is the real output, $\hat Y$ is the full employment output,P and Pᵉ are the actual and expected price levels,respectively.Which of the following is correct?
A)In the Keynesian model,b is positive because of the sticky wage assumption.
B)In the Keynesian model,b is zero because of the sticky wage assumption.
C)In the classical model,b is zero because of the price misperception assumption.
D)Both A and C are correct.

Question

Quizplus · Accepted Answer

In the Keynesian model, the assumption of sticky wages leads to a positive value for b in the short run aggregate supply equation. This is because it assumes that nominal wages are fixed in the short run, so as the price level increases, the real wage decreases and firms are willing to supply more output. The classical model, on the other hand, assumes that prices are flexible and there are no price misperceptions, so b is zero. Therefore, option B and C are incorrect.

Consider the Following Short Run Aggregate Supply Equation: Y = Y^\hat YY^

Consider the Following Short Run Aggregate Supply Equation: Y = $\hat Y$