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Unformatted text preview: Sticky-Price Model The sticky-price model of the upward sloping short-run aggregate supply curve is based on the idea that firms do not adjust their price instantly to changes in the economy. There are numerous reasons for this. First, many prices, like wages, are set in relatively long-term contracts. Imagine if your wage at McDonalds changed every day as the economy changed. Second, firms hold prices stable to keep from annoying regular customers. It would really be a pain if the price of a newspaper changes from 24 cents to 25 cents to 23 cents as the price of paper and ink changed. Third, firms hold prices stable because of menu costs. Menu costs are those costs that are associated with printed catalogues and menus. It would be very expensive to constantly change catalogues and menus in response to economic changes. But how does the fact the prices are sticky in the short run lead to an upward sloping relationship between the price level and output? When firms prepare to set their prices, they take into account between the price level and output?...
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This note was uploaded on 02/09/2012 for the course ECO ECO2013 taught by Professor Jominy during the Fall '08 term at Broward College.
- Fall '08