In the sticky-price model of aggregate supply, if none of the firms in the market have flexible prices, then the short-run aggregate supply curve will be
- horizontal
- vertical
- steeper than it would be if some firms had flexible prices
- upward sloping to the right
The Correct Option is A
Solution and Explanation
In the sticky-price model of aggregate supply, the concept revolves around the idea that prices do not adjust immediately to changes in economic conditions. When firms cannot adjust prices quickly, their price-setting behavior influences how the aggregate supply in the short run behaves. If none of the firms in the market have flexible prices, it implies that all prices remain unchanged in the short run despite any fluctuations in demand or economic conditions.
Under these circumstances, the short-run aggregate supply curve becomes horizontal. This is because the aggregate output or quantity supplied does not change with price level changes in the short run; instead, output is determined by demand. Firms produce exactly the amount where price meets the level of sticky prices set initially, regardless of changes in economic conditions such as demand or cost of inputs.
Therefore, the correct answer is that the short-run aggregate supply curve is horizontal when none of the firms have flexible prices in a sticky-price model.
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