The sticky-price theory of the short-run aggregate supply curve says that if the price level rises by 5% and people were expecting it to rise by 2%,then firms have
A)higher than desired prices which increases their sales.
B)higher than desired prices which depresses their sales.
C)lower than desired prices which increases their sales.
D)lower than desired prices which depresses their sales.

Question

Quizplus · Accepted Answer

According to the sticky-price theory, if the actual price level rises more than expected, firms will have lower than desired prices because they set prices based on expected inflation. This makes their goods relatively cheaper, increasing their sales.

The Sticky-Price Theory of the Short-Run Aggregate Supply Curve Says