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,P is always equal to Pᵉ because of sticky-wage assumption.
B)In the Keynesian model,P may be different than Pᵉ because of sticky-wage assumption.
C)In the Keynesian model,P is always greater than Pᵉ because of sticky-wage assumption.
D)In the Keynesian model,P is always less than Pᵉ because of sticky-wage assumption.

Question

Quizplus · Accepted Answer

In the Keynesian model, prices are sticky downward due to nominal wage rigidity. Therefore, P may be different than Pᵉ in the short run. This is because nominal wages do not adjust immediately in response to changes in the price level, leading to short-run deviations between P and Pᵉ.

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

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