Each of the two models of short-run aggregate supply is based on some market imperfection. In the imperfect-information model, the imperfection is that:
A) some firms do not adjust their prices instantly to changes in demand.
B) contracts and arrangements may prevent nominal wages from adjusting rapidly to changing economic conditions.
C) firms confuse changes in the overall level of prices with changes in relative prices.
D) the real wage adjusts to bring labor supply and labor demand into equilibrium.

Question

Quizplus · Accepted Answer

In the imperfect-information model, the market imperfection is that firms confuse changes in the overall level of prices with changes in relative prices. This confusion leads to adjustments in production levels based on incorrect perceptions of real prices.

Each of the Two Models of Short-Run Aggregate Supply Is