With sticky prices, in the stylized DSGE model, a monetary contraction ________, which ________.
A) raises inflationary expectations; pushes the Phillips curve up
B) lowers inflationary expectations; expands labor supply
C) decreases aggregate demand; decreases labor demand
D) raises taxes; reduces labor demand
E) represents a fiscal expansion; pushes up labor demand

Question

Quizplus · Accepted Answer

With sticky prices, a monetary contraction decreases aggregate demand by reducing the money supply and increasing interest rates. This decrease in aggregate demand decreases labor demand, as firms produce less and hire fewer workers.

With Sticky Prices, in the Stylized DSGE Model, a Monetary