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

question 55

Multiple Choice

Consider the following short run aggregate supply equation: Y= $\hat{\mathrm{Y}}$ + b (P - P^e) , where Y is the real output, $\hat{\mathrm{Y}}$ is the full employment output, P and P^e are the actual and expected price levels, respectively^. Which of the following is correct?

• A) In the classical model, P is always equal to P^e because of price misperception assumption.
• B) In the classical model, P may be different than P^e because of price misperception assumption.
• C) In the classical model, P is always greater than P^e because of price misperception assumption.
• D) In the classical model, P is always less than P^e because of price misperception assumption.

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