According to the sticky-price model, other things being equal, the greater the proportion, s, of firms that follow the sticky-price rule, the ______ the ______ in output in response to an unexpected price increase.
A) greater; increase
B) smaller; increase
C) greater; decrease
D) smaller; decrease

Question

Quizplus · Accepted Answer

In the sticky-price model, if a larger proportion of firms have sticky prices, they cannot adjust their prices quickly in response to an unexpected price increase. This leads to a greater increase in output as firms with flexible prices increase production to meet demand.

According to the Sticky-Price Model, Other Things Being Equal, the Greater