According to the new Keynesian theory, the widespread importance of small menu costs results in variations in aggregate demand causing both

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According to the new Keynesian theory, the widespread importance of small menu costs leads to firms adjusting their prices infrequently. As a result, changes in aggregate demand can result in greater short-run adjustments in real GDP (as firms respond to changes in demand by producing more or less output), but delayed adjustment in the price level (as firms only adjust their prices infrequently). This means that in the short run, changes in aggregate demand can result in fluctuations in real GDP without a corresponding change in the price level.

According to the New Keynesian Theory, the Widespread Importance of Small