The sticky-price theory implies that
A)the short-run aggregate-supply curve is upward-sloping.
B)an unexpected fall in the price level induces firms to reduce the quantity of goods and services they produce.
C)menu costs influence the speed of adjustment of prices.
D)All of the above are correct.

Question

Quizplus · Accepted Answer

The sticky-price theory suggests that prices adjust slowly, resulting in an upward-sloping short-run aggregate-supply curve (A). When prices fall unexpectedly, firms may not be able to adjust their prices immediately, resulting in a reduction in the quantity of goods and services they produce (B). Menu costs, which refer to the costs of changing prices, influence the speed of adjustment of prices and are a key element of the sticky-price theory (C). Therefore, all of the above statements (A, B, and C) are correct.

The Sticky-Price Theory Implies That