The more that firms in an economy believe that the demand for their goods is mainly influenced by the aggregate level of demand and not "local conditions," the ________ is the SAS curve and thus the ________ are cycles in real GDP.
A)steeper,larger
B)steeper,smaller
C)flatter,larger
D)flatter,smaller

Question

Quizplus · Accepted Answer

If firms believe that the demand for their goods is mainly influenced by the aggregate level of demand and not "local conditions," they will be more sensitive to changes in aggregate demand. This means that the SAS curve will be steeper, meaning that a given change in the price level will result in a larger change in output. However, this also means that cycles in real GDP will be smaller since firms will adjust their output more quickly in response to changes in aggregate demand.

The More That Firms in an Economy Believe That the Demand