In New Keynesian macroeconomics,when marginal costs are too sticky to change in proportion to nominal aggregate demand,prices ________ and so menu costs ________ needed to explain business cycles.
A)are also sticky,are
B)are also sticky,are not
C)are still perfectly flexible,are
D)are still perfectly flexible,are not

Question

Quizplus · Accepted Answer

In New Keynesian macroeconomics, prices are assumed to be sticky in the short-run, especially due to menu costs. When marginal costs are too sticky to change in proportion to nominal aggregate demand, prices will also be sticky and not adjust enough to restore equilibrium. Therefore, menu costs are still needed to explain business cycles as firms are reluctant to adjust prices frequently due to the high costs of doing so.

In New Keynesian Macroeconomics,when Marginal Costs Are Too Sticky to Change