What do market clearing models assume about prices?

Market clearing models operate under the assumption that prices are flexible in the long run. This flexibility allows prices to adjust to equate supply and demand in various markets, ultimately leading to an equilibrium where resources are optimally allocated. In these models, it is believed that any imbalances in supply and demand will correct themselves as prices change, enabling the economy to return to a natural level of output.

Assuming flexibility in prices means that when there is excess supply, prices will tend to decrease, and when there is excess demand, prices will increase. This dynamic adjustment process is crucial for the efficient functioning of a market-based economy, allowing it to stabilize over time after any shocks or deviations.

In contrast, other options reflect scenarios inconsistent with the long-term perspective of market clearing models. Fixed or constant prices suggest rigidity in the market, which would prevent the necessary adjustments to clear markets. Volatile prices often imply instability or uncertainty, which would lead to inefficiencies rather than market clearing. Hence, the assumption of price flexibility in the long run aligns perfectly with the principles of market clearing models.