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If all prices are stuck at a predetermined level, then when a short-run aggregate supply curve...

If all prices are stuck at a predetermined level, then when a short-run aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve: a) is vertical. b) is horizontal. c) slopes downward and to the right. d) slopes upward and to the right.

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Answer #1

Option B

  • The short run aggregate supply curve shows how the real GDP deviates from potential output and it is a period in which the prices are sticky in nature.
  • If the real GDP is drawn on the horizontal axis and the prices are drawn in the vertical axis and if the prices are stuck, it means that the prices do not fall even when the aggregate demand falls and there are many unemployed resources.
  • This will cause the short run aggregate supply curve to be perfectly horizontal.
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