The Sticky-Price Theory of the Short-Run Aggregate Supply Curve Says

question 86

Multiple Choice

The sticky-price theory of the short-run aggregate supply curve says that if the price level rises by 5% and people were expecting it to rise by 2%,then firms have

• A)higher than desired prices,which leads to an increase in the aggregate quantity of goods and services supplied.
• B)higher than desired prices,which leads to a decrease in the aggregate quantity of goods and services supplied.
• C)lower than desired prices,which leads to an increase in the aggregate quantity of goods and services supplied.
• D)lower than desired prices,which leads to a decrease in the aggregate quantity of goods and services supplied.

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Definitions:

Profit-Maximizing

The process of identifying the best level of output at which a company can produce goods or services to achieve the highest possible profit.

Product-Variety Externalities

Economic externalities that arise when the introduction of new products benefits consumers by providing a wider array of choices, potentially affecting their utility and the demand for various goods.

Business-Stealing

The negative impact on existing firms when new entrants to the market capture some of their market share, leading to potentially lower profits for the incumbents.

Long Run Entry

The process by which new firms enter a market, adjusting the supply side of the market, typically considering all factors of production as variable.