According to the sticky-price model, output will be at the natural level if:
A) firms expect a high price level and the demand for goods is high.
B) the proportion of firms with flexible prices equals the proportion of firms with sticky prices.
C) the price level equals the expected price level.
D) expectations are formed adaptively, but not if expectations are formed rationally.

Question

Quizplus · Accepted Answer

The sticky-price model suggests that output deviates from its natural level when actual prices differ from expected prices. Therefore, when the actual price level equals the expected price level, output will be at its natural level, as firms' expectations are aligned with reality, allowing them to set prices appropriately.

According to the Sticky-Price Model, Output Will Be at the Natural