If prices and wages are slow to adjust ("sticky," rather than flexible):
A)Inflation would adjust rapidly
B)Output gaps would disappear quickly
C)Inflation would adjust to output gaps sluggishly
D)The short-run aggregate supply curve would not shift

Question

Quizplus · Accepted Answer

If prices and wages are slow to adjust, it means that they are "sticky" and do not change quickly in response to economic shocks such as changes in demand or supply. This leads to a lag in adjusting to output gaps, which are the difference between actual output and potential output. As a result, inflation would also adjust to output gaps sluggishly. This means that in the short run, the economy may experience both inflation and output gaps, which can be a challenging situation for policymakers. The short-run aggregate supply curve may also shift if there are changes in input prices or technology, but this would be a separate issue from the stickiness of prices and wages.

If Prices and Wages Are Slow to Adjust ("Sticky," Rather