Because not all prices adjust instantly to changing conditions, an unexpected fall in the price level leaves some firms with higher-than-desired prices, and these higher-than-desired prices depress sales and induce firms to reduce the quantity of goods and services they produce.

Question

Quizplus · Accepted Answer

This is known as the sticky price theory and is one of the reasons why an unexpected fall in the price level can lead to a decrease in output and employment in the short run.

Because Not All Prices Adjust Instantly to Changing Conditions, an Unexpected