If the average interval between firms' price adjustments is relatively short

Question

Quizplus · Accepted Answer

In this situation, firms can quickly adjust their prices in response to changes in demand, meaning that an increase in aggregate demand will result in a relatively short-lived increase in real GDP as firms increase output to meet the higher demand. Conversely, a reduction in aggregate demand will also result in a relatively short-lived reduction in real GDP as firms adjust their prices and production levels in response to the lower demand. Option B and C are incorrect as they suggest relatively long-lived effects, which is not consistent with the short interval between firms' price adjustments.

If the Average Interval Between Firms' Price Adjustments Is Relatively