Using the sticky-price model, the higher the average rate of inflation, the more frequently firms must adjust their prices, which implies that a high rate of inflation:
A) has no effect on the slope of the short-run aggregate supply curve.
B) should make the short-run aggregate supply curve flatter.
C) makes the short-run aggregate supply curve steeper.
D) causes prices to be sticky.

Question

Quizplus · Accepted Answer

According to the sticky-price model, a higher rate of inflation causes firms to have to adjust their prices more frequently. This means that the short-run aggregate supply curve becomes steeper because firms are not able to adjust their prices immediately and must wait until their next price adjustments. Thus, a high rate of inflation makes the short-run aggregate supply curve steeper.

Using the Sticky-Price Model, the Higher the Average Rate of Inflation