In the new Keynesian view, the larger the proportion of firms in the economy with sticky prices,
A)the steeper the SRAS curve will be.
B)the flatter the SRAS curve will be.
C)the greater the increase in the price level for a given shift in the AD curve.
D)the less effective is fiscal policy in increasing output.

Question

Quizplus · Accepted Answer

In the new Keynesian view, firms with sticky prices lead to a flatter short-run aggregate supply (SRAS) curve. This is because these firms are slower to adjust their prices in response to changes in demand, so a given increase in aggregate demand leads to a smaller increase in output and a larger increase in the price level. This also means that fiscal policy is less effective in increasing output as the flatter SRAS curve means that a given increase in AD will lead to a smaller increase in output.

In the New Keynesian View, the Larger the Proportion of Firms