ABSTRACT
In earlier chapters, we assumed mostly that prices were fixed; indeed price variables were included in some of the models, but we would ignore changes in price and focus on other issues. However, in the last section of the previous chapter, prices are assumed to be sticky in the short run, but they adjust in the medium run: that approach allowed us to investigate how medium-run price adjustments would eventually modify the effect of policies deemed effective in the short run. The mediumrun price adjustment assumption corresponds to an upward-sloping aggregate supply curve. In this chapter, we extend the idea of price flexibility to its utmost; perfect flexibility at all times. In making this assumption, we leave the Keynesian world of sticky prices in the short run and enter the world of monetarists, who believe that prices are absolutely flexible, i.e. they adjust fully and immediately to any change; the aggregate supply curve is vertical.
