Which of the following are the assumptions of R. Dornbusch's Sticky price model ? I) Prices and wages…
II, III and IV are assumptions of the basic sticky-price model. Purchasing-power parity holds in the long run, capital markets clear rapidly, and output is held at its…
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Which of the following are the assumptions of R. Dornbusch's Sticky price model ?
I) Prices and wages adjust instantaneously to excess demand supply.
II) PPP holds in the long-run
III) Capital markets are efficient and are in equilibrium.
IV) Fixed output at full-employment level.
Answer and explanation
Correct answer D
II, III and IV are assumptions of the basic sticky-price model. Purchasing-power parity holds in the long run, capital markets clear rapidly, and output is held at its full-employment level. Goods prices adjust slowly, so instantaneous price and wage adjustment is inconsistent with the model.
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Telangana SET (TG SET)