If prices are "sticky" in the short run, then
A) the economy will respond to demand shocks primarily through changes in output and employment.
B) the economy will respond to demand shocks primarily through changes in prices and inﬂation.
C) prices will adjust to equalize the quantities demanded and supplied of goods and services.
D) unemployment will not change in response to a demand shock.

Question

Quizplus · Accepted Answer

Sticky prices refer to the concept that prices do not adjust immediately to changes in demand or supply, but rather gradually over time. In the short run, this means that changes in demand will primarily be absorbed by changes in output and employment rather than changes in prices, as prices are slow to adjust. Therefore, option A is the best choice. Option B is incorrect because prices are sticky in the short run, meaning they do not adjust quickly to changes in demand, so changes in prices and inflation are not the primary means by which the economy responds to demand shocks. Option C is incorrect because in the short run, prices are sticky and do not necessarily adjust to clear markets, and option D is incorrect because changes in output and employment will lead to changes in unemployment levels.

If Prices Are "Sticky" in the Short Run, Then