Question

The sticky-price theory of the short-run aggregate supply curve says that if the price level rises by 5% while firms were expecting it to rise by 2%, then some firms with high menu costs will have:________.

Answer 1

Answer:

to keep their prices the same

Explanation:

Remember, having a higher Menu cost implies that such a firm would suffer more if it adjusted its prices.

So the sticky-price theory makes the assumption that a firm that notices an increase in the prices of their products would keep their prices low out of fear that doing so would result in losses for the firm if demand changes negatively.