This article examines how the aggregate production varies with inflation when there are fixed price- and quantity-adjustment costs. It shows that such variation is determined by the elasticity of the firms' marginal real revenue with respect to demand. The aggregate production decreases with inflation if this elasticity always exceeds minus unity, whereas the aggregate production increases with inflation if the elasticity is always less than minus unity. The aggregate production is independent of inflation in the special case that the elasticity always equals minus unity. The latter occurs if demand is derived from a log-quadratic utility function. (JEL E31).
ASJC Scopus subject areas
- Business, Management and Accounting (all)
- Economics and Econometrics