In the new Keynesian view, which of the following expressions correctly states the relationship between the price that an individual firm with flexible prices charges and the aggregate price level?
A)p = P + b(Y - Y)
B)P = p + b(Y - Y)
C)p = P + b(Y + Y)
D)p = P + b(Y - Y)

Question

Quizplus · Accepted Answer

The correct expression is A) p = P + b(Y - Yue009), which reflects the idea that an individual firm's price (p) is related to the aggregate price level (P) and adjusts based on the difference between actual output (Y) and potential output (Yue009). This captures the concept that firms with flexible prices will adjust their prices in response to the gap between actual and potential output, influencing the overall price level.

In the New Keynesian View, Which of the Following Expressions