When the actual change in the price level differs from its expected change,which of the following can explain why firms might change their production?
A)both menu costs and mistaking a price level change for a change in relative prices
B)menu costs but not mistaking a price level change for a change in relative prices
C)mistaking a price level change for a change in relative price but not menu costs
D)neither menu costs nor mistaking a price level change for a change in relative prices

Question

Quizplus · Accepted Answer

Both menu costs and mistaking a price level change for a change in relative prices can explain why firms might change their production when the actual change in the price level differs from its expected change. Menu costs can make it costly for firms to adjust prices immediately, and mistaking a price level change for a change in relative prices may distort the signals that firms receive about the demand for their products, leading them to change production.

When the Actual Change in the Price Level Differs from Its