The sticky-price theory of the short-run aggregate supply curve says that if the price level rises by 5% and people were expecting it to rise by 2%,then firms have
A)higher than desired prices,which leads to an increase in the aggregate quantity of goods and services supplied.
B)higher than desired prices,which leads to a decrease in the aggregate quantity of goods and services supplied.
C)lower than desired prices,which leads to an increase in the aggregate quantity of goods and services supplied.
D)lower than desired prices,which leads to a decrease in the aggregate quantity of goods and services supplied.

Question

Quizplus · Accepted Answer

According to the sticky-price theory, if the actual price level rises more than expected, firms will have lower than desired prices because they set prices based on expected inflation. This discrepancy leads firms to increase production to meet the higher demand at these lower relative prices, thus increasing the aggregate quantity of goods and services supplied.

The Sticky-Price Theory of the Short-Run Aggregate Supply Curve Says