In the classical model of the price level, prices are _____, the short-run aggregate supply curve is vertical, and as a result, a decrease in the money supply leads to _____ in the aggregate price level.
A) sticky; a more than proportional decrease
B) flexible; a proportional decrease
C) sticky; a more than proportional increase
D) flexible; a proportional increase

Question

Quizplus · Accepted Answer

In the classical model, prices are considered flexible, meaning they can adjust quickly to changes in supply and demand. Therefore, a decrease in the money supply would lead to a proportional decrease in the aggregate price level, as the short-run aggregate supply curve is vertical, indicating that output is not affected by changes in the price level.

In the Classical Model of the Price Level, Prices Are