When the general price level rises and firms decide not to change their prices in the short run,this can be attributed to
A) menu costs.
B) legally binding contracts.
C) inflexible input prices.
D) money illusion.
E) a decline in revenues.

Question

Quizplus · Accepted Answer

The phenomenon of rising prices and firms not changing their prices in the short run is known as sticky prices. This can be attributed to menu costs, which are the costs that firms incur in changing their prices. These costs include the cost of reprinting menus, advertising new prices, reprogramming cash registers, etc. Firms may be reluctant to incur these costs, especially if they expect the price increase to be temporary. As a result, they may choose to maintain their current prices despite rising costs.

When the General Price Level Rises and Firms Decide Not