Question

what did keynes mean when he said that prices are sticky?
a. prices are inflexible upward due to the aversion people have to higher prices.
b. prices, especially the price of labor, are inflexible downward.
c. prices need to be sticky or we would have cost - push inflation.
d. prices are sticky because of cost - push inflation.

Explanation:

Keynesian economics emphasizes that prices, particularly the price of labor (wages), do not adjust easily downward. Workers resist wage cuts (nominal wage rigidity), and firms may be reluctant to cut prices due to various factors like menu costs (costs of changing prices). This downward inflexibility is what Keynes referred to as "price stickiness".

• Option A is incorrect as the key aspect of Keynesian price stickiness is about downward inflexibility, not upward inflexibility due to aversion to higher prices.
• Option C is wrong because it misrepresents the cause - effect relationship. Price stickiness is a phenomenon in Keynesian analysis, not a preventive measure for cost - push inflation.
• Option D is incorrect as it reverses the relationship. Cost - push inflation can be an outcome in some economic situations, but price stickiness (especially of wages) is a core Keynesian concept about price (wage) inflexibility, not caused by cost - push inflation in the Keynesian framework.

Answer:

B. Prices, especially the price of labor, are inflexible downward.