Suppose that wages and prices are quite flexible,so that the short-run aggregate supply curve is steep.In that case,________.
A)policies to stabilize inflation are probably needed more than policies to stabilize economic activity
B)supply shocks will destabilize inflation,but have minimal impact on output
C)demand shocks will destabilize output,but have minimal impact on inflation
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

When wages and prices are flexible, the short-run aggregate supply curve is steep, indicating that changes in aggregate demand will have a relatively small impact on output but a larger impact on prices. Therefore, policies to stabilize inflation are probably needed more than policies to stabilize economic activity. Supply shocks will still have a destabilizing effect on inflation, but their impact on output will be minimal due to the steep short-run aggregate supply curve. Demand shocks will have a greater impact on output, but their effect on inflation will be limited due to the ability of wages and prices to adjust quickly.

Suppose That Wages and Prices Are Quite Flexible,so That the Short-Run