In new Keynesian theory, the pattern of inflation exhibited by an economy with growing aggregate demand known as inflation dynamics is
A) initially sluggish upward adjustment of the price level and inflation in response to higher aggregate demand followed by higher inflation in the future.
B) initially speedy upward adjustment of the price level and inflation in response to higher aggregate demand followed by lower inflation in the future.
C) initially sluggish downward adjustment of the price level and inflation in response to higher aggregate demand followed by lower inflation in the future.
D) initially speedy upward adjustment of the price level and inflation in response to higher aggregate demand followed by higher inflation in the future.

Question

Quizplus · Accepted Answer

New Keynesian theory suggests that due to price stickiness, inflation does not immediately jump in response to increased aggregate demand but adjusts sluggishly, leading to higher inflation in the future as the economy adjusts.

In New Keynesian Theory, the Pattern of Inflation Exhibited by an Economy