Question

In our aggregate expenditure model we assume that:

O individual firms’ prices are flexible but the price level is fixed.
O both individual firms’ prices and the price level are flexible.
O both individual firms’ prices and the price level are fixed.
O individual firms’ prices are fixed but the price level is flexible

Answer 1

The correct answer is regarding the model, is that an individual firms prices are flexible but the level of the price is fixed.

Step-by-step explanation:

The aggregate expenditure model is the model in which the sum or total of all the expenditures are undertaken in the economy with the factors during the particular time period.

The equation is:

AE = C (Consumption) + I (Investment) + G (Government) + NX (Net Exports)

In this model, it is assumed that the prices of the individual firm are flexible whereas the price level is fixed.