Each of the Three Models of Short-Run Aggregate Supply Is

question 97

Multiple Choice

Each of the three models of short-run aggregate supply is based on some market imperfection.In the imperfect-information model,the imperfection is that:

• A) some firms do not adjust their prices instantly to changes in demand.
• B) contracts and arrangements may prevent nominal wages from adjusting rapidly to changing economic conditions.
• C) firms confuse changes in the overall level of prices with changes in relative prices.
• D) the real wage adjusts to bring labour supply and labour demand into equilibrium.

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Definitions:

Perfectly Elastic

Describes a situation in which the quantity demanded or supplied changes by an infinite amount in response to any price change, depicted as a horizontal line on a graph.

Long-run Equilibrium

A state in which all factors of production are variable, leading to a situation where firms only earn normal profits and no incentives exist for entering or exiting the industry.

Short-run Equilibrium

The condition in which the quantity supplied equals the quantity demanded at a particular price level, but only over a short period.

Purely Competitive Firm

A company operating in a market where there are many buyers and sellers, with none being able to influence the market price significantly.