Which of the following statements is NOT true?
A) Many agents suffer from money illusion.
B) Small menu prices lead to price stickiness.
C) Under adaptive expectations, prices are perfectly flexible.
D) In the classical dichotomy, all prices are flexible.
E) Imperfect competition may lead to price inflexibility.

Question

Quizplus · Accepted Answer

Under adaptive expectations, prices are not perfectly flexible. Adaptive expectations suggest that agents use past inflation rates to form their expectations for future inflation. If prices were perfectly flexible under these expectations, any shock to demand or supply would be immediately reflected in prices, and inflation would be extremely volatile. However, in reality, prices are sticky and adjust more gradually, leading to a slower convergence towards the new equilibrium inflation rate.

Which of the Following Statements Is NOT True