The short-run aggregate supply (SRAS) curve is based on the following assumptions:
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Nominal wages were established by firms and workers, with the belief that the price level will stay constant. - This is a fundamental assumption of the SRAS, as it implies that wages are sticky in the short run and do not adjust immediately to changes in the price level.
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Product prices are inflexible and will remain constant even when input prices change. - This statement reflects the idea that in the short run, firms may not be able to fully adjust their prices in response to changes in input costs or demand conditions.
The other two options are not typically associated with the SRAS curve:
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The price level is flexible both upward and downward. - This statement is more characteristic of the long-run aggregate supply (LRAS) framework, where prices and wages are assumed to be fully flexible.
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Nominal wages are flexible and will rise and fall along with the price level. - This statement contradicts the assumption of wage stickiness that typically underpins the SRAS curve.
Thus, the correct assumptions for the short-run aggregate supply curve are:
- Nominal wages were established by firms and workers, with the belief that the price level will stay constant.
- Product prices are inflexible and will remain constant even when input prices change.