Assume that the sticky price theory holds. If the SRAS is Y=Y*+2[P-E(P)] and the fraction of firms with sticky prices is 0.2, then the price set by...

Assume that the sticky price theory holds. If the SRAS is Y=Y*+2[P-E(P)] and the fraction of firms with sticky prices is 0.2, then the price set by firms with flexible prices is:

(a) Pf = P + 0.5(Y-Y*)

(b) Pf = P + 0.8(Y-Y*)

(c) Pf = P + 0.125(Y-Y*)

(d) Pf = 0.8E(P)

Note: Pf = P + a(Y-Y*)