Menu costs help to explain
A) the negative slope of the aggregate demand curve.
B) the negative slope of the aggregate supply curve.
C) the positive slope of the short-run aggregate supply curve.
D) why the long-run aggregate supply curve is vertical.
E) why the long-run aggregate supply curve is horizontal.

Question

Quizplus · Accepted Answer

Menu costs refer to the costs that firms incur when they change their prices. These costs lead to sticky prices in the short run, which means that firms are reluctant to change their prices immediately in response to changes in demand or costs. As a result, the short-run aggregate supply curve has a positive slope, since higher prices lead to higher output. However, in the long run, firms will eventually adjust their prices to reflect changes in demand or costs, and menu costs will no longer be a factor. This leads to a vertical long-run aggregate supply curve.

Menu Costs Help to Explain