Question

According to the sticky-price model, other things being equal, the greater the proportion s of firms that follow the sticky-price rule, the ______ the ______ in output in response to an unexpected price increase.

a. greater; decrease.
b. smaller; increase.
c. greater; increase.
d. smaller; decrease.

Answer 1

The correct answer is c. greater; increase.

Step-by-step explanation:

The models follow one another by altering the assumptions about the flexible or rigid nature of the prices determined in the different markets.

• Flexible price: the price varies, increasing when there is excess demand and decreasing when there is excess supply.

• Rigid price: it does not follow the logic of the mentioned variation because it responds to other factors or because although it varies according to the logic described above, it does not do so sufficiently for the market to balance instantly. (IMP .: do not confuse rigid price with constant price).