If expectations are formed rationally and wages are inflexible in the short run, the short-run aggregate supply curve is
A) upward sloping.
B) horizontal.
C) vertical.
D) relatively flat.

Question

Quizplus · Accepted Answer

If expectations are formed rationally, firms will not change their production plans in response to changes in the price level in the short run. Therefore, the short-run aggregate supply curve will be vertical, indicating that the economy's output is fixed in the short run regardless of the price level.

If Expectations Are Formed Rationally and Wages Are Inflexible in the Short