The indication of the sticky price model of
Answer to Problem 1QQ
Option 'a' is correct.
Explanation of Solution
The supply curve of the individual is known as the individual supply curve. The aggregate supply is the summation of all individual supply curves of the economy.
Option (a):
When the market is facing a price fluctuation, the output would also face the same. Under the small price drops, the output does not fall much due to the sticky prices of the goods and services in the economy. But when there is a larger fall in the price level which makes it below the expected level, then the sticky prices will not act, and the economy would face the fall in the total output. Thus, the sticky price model explains the reason the output declines when prices fall below the expected prices. Thus, option 'a' is correct.
Option (b):
The sticky price theory is a theory that explains that when there is a small change in the inflation level in the economy, the prices of goods and services would not immediately react to it and change the prices. The prices would remain sticky up to the point where the actual inflation becomes more than the expected level of inflation. Thus, option 'b' is incorrect.
Option (c):
The sticky price model explains the stickiness of the price level that does not make the prices to immediately move toward a new market-clearing price level in the economy. It does not explain the scars that the recession can make on the economy, which means that option 'c' is incorrect.
Option (d):
The natural rate of
Aggregate supply: Aggregate supply is the total supply of goods and services available in the economy from all its producers.
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