Much of macroeconomic theory has been developed under the simplifying assumption that relative prices and wages are fixed,or equivalently that the economy is producing one good using one input (labor)with one wage rate.Such an assumption is clearly ________ of New Keynesian macroeconomics,given its emphasis on the importance of ________ in explaining business cycles.
A)part,profit maximization
B)part,staggered contracts
C)not part,profit maximization
D)not part,staggered contracts

Question

Quizplus · Accepted Answer

The assumption of fixed relative prices and wages is not part of New Keynesian macroeconomics, given its emphasis on the importance of staggered contracts in explaining business cycles. Staggered contracts arise when firms and workers cannot adjust their prices and wages simultaneously, leading to temporary changes in relative prices and nominal rigidities in the economy.

Much of Macroeconomic Theory Has Been Developed Under the Simplifying