If firms maintain preset prices in the short run, then the primary cause of outputs gaps is changes in:

Question

Quizplus · Accepted Answer

If firms maintain preset prices in the short run, shifts in aggregate demand and economy-wide spending will create output gaps. When spending decreases, firms cannot sell all their outputs at preset prices resulting in an increase in inventories, reduced production, and a decrease in output. On the other hand, when spending increases, firms will increase production and output resulting in a short-term increase in output above potential output.

If Firms Maintain Preset Prices in the Short Run, Then