What Assumptions About Wage and Price Flexibility Are Possible in the AD-AS

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The Answer is <img src="https://d2lvgg3v3hfg70.cloudfront.net/TB3378/11eb1117_e8f2_8557_b6c5_bd54ad6e50fe_TB3378_00.jpg" alt="  One possible assumption is that wages and prices are perfectly flexible. When wages and prices are perfectly flexible, the actual growth rate of real GDP will be equal to the economy's potential growth rate. As the diagram shows, the potential growth rate, or the Solow growth rate, is 6%. Because the Solow growth rate does not depend on the rate of inflation, the long-run aggregate supply curve is vertical. Another possible assumption is that wages and prices are sticky-or not perfectly flexible in the short run. In this case, the short-run aggregate supply curve (SRAS) slopes upward, as shown in the diagram. The upward-sloped SRAS curve implies that higher than expected inflation will increase output growth and lower than expected inflation will decrease output growth." class="answers-bank-image d-block" rel="preload" > One possible assumption is that wages and prices are perfectly flexible. When wages and prices are perfectly flexible, the actual growth rate of real GDP will be equal to the economy's potential growth rate. As the diagram shows, the potential growth rate, or the Solow growth rate, is 6%. Because the Solow growth rate does not depend on the rate of inflation, the long-run aggregate supply curve is vertical. Another possible assumption is that wages and prices are sticky-or not perfectly flexible in the short run. In this case, the short-run aggregate supply curve (SRAS) slopes upward, as shown in the diagram. The upward-sloped SRAS curve implies that higher than expected inflation will increase output growth and lower than expected inflation will decrease output growth.

What Assumptions About Wage and Price Flexibility Are Possible in the AD-AS

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