In the Keynesian model of aggregate expenditure, we assume that firms will
A) not change prices.
B) raise prices when inventory levels fall.
C) change prices only when inventory levels rise.
D) lower prices when inventory levels rise.

Question

Quizplus · Accepted Answer

In the Keynesian model, we assume that firms will not change prices in the short run. Instead, they adjust their production levels to meet changes in aggregate demand. This means that if aggregate expenditure increases, firms will produce more output without raising prices. Similarly, if aggregate expenditure declines, firms will reduce their output without lowering prices. The assumption of price stickiness in the short run is a key feature of the Keynesian model, and it implies that changes in aggregate demand can have significant effects on output and employment.

In the Keynesian Model of Aggregate Expenditure, We Assume That