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Macroeconomics

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More Flexible Prices

MACRO-PXNRBY

Assume the economy is in short-run equilibrium below its natural rate of output and that a fraction of the firms in the economy has fixed prices.

Recent technologies, such as online shopping, have the potential of making prices more flexible in the short run as a higher fraction of firms have flexible prices.

How does the greater flexibility in prices influence the effectiveness of policy in responding to the recession?

A

The output response will be stronger and the price effect weaker if more firms have flexible prices

B

The output response will be stronger and the price effect will be stronger as well if more firms have flexible prices

C

The output response will be weaker and the price effect will be weaker as well if more firms have flexible prices

D

The output response will be weaker and the price effect will be stronger is more firms have flexible prices