Which of the following statements is NOT true?
A) Small menu prices lead to price stickiness.
B) In the classical dichotomy, some prices are sticky.
C) In the classical dichotomy, an increase in money supply growth leads to a corresponding increase in inflation.
D) Short-run contracts lead to price persistence.
E) Imperfect information may lead to price inflexibility.

Question

Quizplus · Accepted Answer

In the classical dichotomy, it is assumed that real and nominal variables can be separated, meaning that changes in the money supply should only affect nominal variables (like the price level or inflation) and not real variables (like output or employment). Therefore, the concept of price stickiness, where prices do not adjust immediately to changes in economic conditions, does not apply within the classical dichotomy framework.

Which of the Following Statements Is NOT True