In which of the following cases will the AS-curve be horizontal?
A)if nominal wages and prices always change proportionally, leaving real wages unchanged
B)if nominal wages do not change even if there is high unemployment
C)if nominal wages are completely flexible
D)if the economy is always in a full-employment equilibrium
E)if fiscal policy has no impact on the output level

Question

Quizplus · Accepted Answer

The AS (Aggregate Supply) curve will be horizontal if nominal wages do not change even if there is high unemployment. This implies that firms can hire as many workers as they want at the current wage rate without causing wages to rise, which in turn means that the aggregate supply is perfectly elastic at this wage rate. This situation is often associated with a liquidity trap or a deep recession where the economy is operating below its potential output and changes in demand do not lead to changes in prices or wages.

In Which of the Following Cases Will the AS-Curve Be