The sticky-price theory asserts that the output prices of some goods and services adjust slowly to changes in the price level. suppose firms announce the prices for their products in advance, based on an expected price level of 100 for the coming year. many of the firms sell their goods through catalogs and face high costs of reprinting if they change prices. the actual price level turns out to be 110. faced with high menu costs, the firms that rely on catalog sales choose not to adjust their prices. sales from catalogs will
3. Fall Below
1. FALL. Due to the Menu Costs (costs to suppliers of having to constantly update prices) of inflation being too high for the Catalogue sellers. They leave the prices where they are at 100. Prices have fallen to 90 though so people will therefore buy less from catalogues as they will be considered more expensive.
2. REDUCING. Firms dealing with Catalogues will respond by reducing output. The more output they supply, the more variable costs they deal with. Seeing as their Demand has fallen leading to a reduction in profitability, they will scale back operations to try to spend less and also because less people are buying output.
3. Fall Below. The Quantity of output supplied was dependant on a price level of 100. That was where the natural rate was. Now as prices have fallen and quantity supplied have gone with them, the effect would be a fall Below the Natural Output Level.
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Sales from catalogs will - Fall
Sales from catalogs will fall because the firms adjusted their prices to an index of 100, but the index turned out to be 90, so their goods and 10% higher than average, which will naturally reduce demand for them.
And firms that rely on catalogs will respond by - Decreasing - the quantity of output the supply
Because catalog firms will not sell as much, they will decrease the number of goods they produce and offer, with the goal of reducing costs.
The unexpected decrease in the price level causes the quantity of output supplied - to fall - below the natural level of ouput in the short run
Firms will artificially adjust their supply because of the differences in prices, will will cause a fall in the natural level of ouput in the short run.