In the Keynesian model, prices and nominal wages are _____, the short-run aggregate supply curve is upward sloping, and as a result, an increase in the money supply leads to _____ in the aggregate price level.
A) sticky; a less than proportional decrease
B) flexible; a proportional decrease
C) sticky; a less than proportional increase
D) flexible; a proportional increase

Question

Quizplus · Accepted Answer

In the Keynesian model, prices and nominal wages are sticky, meaning they do not adjust immediately in response to changes in demand or supply. The short-run aggregate supply curve is upward sloping, implying that an increase in the money supply will lead to an increase in output but also a less-than-proportional increase in the aggregate price level due to the stickiness of prices and wages. Therefore, choice C is the correct answer.

In the Keynesian Model, Prices and Nominal Wages Are _____