Small menu costs and aggregate-demand externalities There are externalities to price adjustment:A price reduction by one firm causes the overall price level to fall (albeit slightly).This raises real money balances and increases aggregate demand,which benefits other firms. Menu costs are the costs of changing prices(e.g.,costs of printing new menus or mailing new catalogs) In the presence of menu costs,sticky prices may be optimal for the firms setting them even though they are undesirable for the economy as a whole. • Small menu costs and aggregate-demand externalities • There are externalities to price adjustment: A price reduction by one firm causes the overall price level to fall (albeit slightly). This raises real money balances and increases aggregate demand, which benefits other firms. • Menu costs are the costs of changing prices (e.g., costs of printing new menus or mailing new catalogs) • In the presence of menu costs, sticky prices may be optimal for the firms setting them even though they are undesirable for the economy as a whole