The new Keynesian sticky-price theory suggests that an unexpected fall in the price level leaves some firms with higher-than-desired prices because of menu costs, causing sales to be depressed and inducing the firms to increase the quantity of goods and services they produce.

Question

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The new Keynesian sticky-price theory suggests that an unexpected fall in the price level leaves some firms with higher-than-desired prices because of menu costs, causing sales to be depressed. However, this does not induce firms to increase production; rather, it may lead to a reduction in output because firms are selling less at the higher-than-desired prices.

The New Keynesian Sticky-Price Theory Suggests That an Unexpected Fall