What is the primary reason that changes in total spending lead to cyclical changes in output and employment?
A) Government is unable to respond by changing the amount of money in circulation.
B) Changes in total spending cause supply shocks that cause cyclical variation.
C) Prices are sticky in the short run.
D) Prices are ﬂexible in the long run.

Question

Quizplus · Accepted Answer

The primary reason that changes in total spending cause cyclical changes in output and employment is that prices are sticky in the short run. This means that when demand increases or decreases, firms cannot immediately adjust prices to match the new level of demand, so they adjust output instead. In the short run, an increase in total spending leads to an increase in output and employment as firms produce more to meet the higher demand. Conversely, a decrease in total spending leads to a decrease in output and employment as firms cut back on production to match the lower demand.

What Is the Primary Reason That Changes in Total Spending