Question

36. A. Illustrate and explain the aggregate supply in the case of flexible prices, also B. Illustrate and explain the aggregate demand in the case of flexible prices

Answer 1

Flexible price is pre-condition under the classical model. The flexible price makes the supply curve upward sloping. Thus, the supply curve does not take the horizontal shape. The supply curve becomes more effective in adjusting the economy.

Under the recession, the flexible price would make the aggregate demand most adjusting. Fall in the demand would not cause a larger impact on the economy. Demand and supply forces would try to keep the economy at the larger output level.

In other words, when prices are flexible, the demand and supply forces cause the smaller economic fluctuation.