Suppose that nominal aggregate demand falls by 4 percent,and at the same time every marginal cost also falls by 4 percent.The importance of menu cost theory is that in this situation the price level ________,meaning that a recession ________.
A)must fall by 4 percent as well,does not occur
B)must fall by 4 percent as well,must occur
C)still might not fall,may not occur
D)still might not fall,may occur

Question

Quizplus · Accepted Answer

Menu cost theory suggests that prices might not adjust immediately to changes in demand or costs due to the costs associated with changing prices. Therefore, even if nominal aggregate demand and marginal costs fall, prices might not decrease, potentially leading to a recession.

Suppose That Nominal Aggregate Demand Falls by 4 Percent,and at the Same