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Chapter 17: Q. 14 (page 395)

Normally, when aggregate demand increases, firms find it more profitable to raise prices than to leave prices unchanged. The idea behind the small-menu-cost explanation for price stickiness is that firms will leave their prices unchanged if their profit gain from adjusting prices is less than the menu costs they would incur if they change prices. If firms anticipate that a rise in demand is likely to last for a long time, does this make them more or less likely to adjust their prices when they face small menu costs? (Hint: Profits are a flow that firms earn from week to week and month to month, but small menu costs are a one-time expense.)

Short Answer

Expert verified

No, there's not any must adjust prices when firms are faced with small menu costs. the price levels are adjusted within the long term spontaneously.

Step by step solution

01

Introduction

That firms will leave their prices unchanged if their profit gain from adjusting prices might be a smaller amount than the menu costs they might incur if they alter prices. Therefore, there is not any should adjust the value levels. the value levels are adjusted within the long term spontaneously.

02

Explanation 

  • It is interesting to notice that tiny menu costs discourage firms from fluctuating prices in response to demand changes.
  • No, there's no must adjust prices when firms are faced with small menu costs because; aggregate demand is increased by fixed costs.
  • means the firms are within the equilibrium level within the longer term which they go to induce more profits although they're facing small menu costs.

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Most popular questions from this chapter

The real-business-cycle approach attributes even short-run increases in real GDP largely to aggregate supply shocks. Rightward shifts in aggregate supply tend to push down the equilibrium price level. How could the real-business-cycle perspective explain the low but persistent inflation that the United States experienced until 2007?

The policy relevance of new Keynesian inflation dynamics based on the theory of small menu costs and sticky prices depends on the exploitability of the implied relationship between inflation and real GDP. Explain in your own words why the average time between price adjustments by firms is a crucial determinant of whether policymakers can actively exploit this relationship to try to stabilize real GDP.

Take a look at Figure 17-3. Explain whether the cyclical unemployment rate is positive, zero, or negative at point E2, after the shift in the aggregate demand curve from AD1to AD2. In addition, explain whether the cyclical unemployment rate is positive, zero, or negative at point E3the shift in the short-run aggregate supply curve from SRAS1to SRAS2.

Describe an inverse relationship between inflation and unemployment.

People called "Fed watchers" earn their living by trying to forecast what policies the Federal Reserve will implement within the next few weeks and months. Suppose that Fed watchers discover that the current group of Fed officials is following very systematic and predictable policies intended to reduce the unemployment rate. The Fed watchers then sell this information to firms, unions, and others in the private sector. If pure competition prevails, prices and wages are flexible, and people form rational expectations, are the Fed's policies enacted after the information sale likely to have their intended effects on the unemployment rate?
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