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.
if the prices were sticky, according to keynes, this would then imply that the
a. short - run aggregate supply is horizontal.
b. long - run aggregate demand vertical.
c. short - run aggregate demand horizontal.
d. long - run aggregate supply is vertical.

Explanation:

• For the first question:
• Keynesian economics emphasizes that prices, especially the price of labor (wages), are inflexible downward. Workers resist wage cuts, and firms are reluctant to cut prices in the face of declining demand in the short - run.
• Option A is incorrect as Keynesian sticky - price theory is more about downward inflexibility. Option C and D misinterpret the relationship between sticky prices and inflation.
• For the second question:
• If prices are sticky (especially in the short - run), the short - run aggregate supply curve is horizontal. In the Keynesian model, in the short - run, firms will adjust output at a given price level (because of sticky prices).
• The long - run aggregate supply is vertical (classical view, based on full - employment and flexible prices in the long - run), and aggregate demand is a downward - sloping curve.

Answer:

• First question: B. Prices, especially the price of labor, are inflexible downward.
• Second question: A. short - run aggregate supply is horizontal.