Wage and price stickiness
A) gives rise to a vertical long-run aggregate supply curve.
B) gives rise to a vertical short-run aggregate supply curve.
C) creates a surplus or a shortage of real GDP.
D) prevents the economy from producing its potential level of real GDP.

Question

Quizplus · Accepted Answer

Wage and price stickiness can prevent the economy from adjusting quickly to changes in demand and supply, causing a decrease in the level of production and preventing the economy from achieving potential output. This is why wage and price stickiness result in a horizontal short-run aggregate supply curve, leading to a trade-off between inflation and unemployment in the short run, and why policy interventions such as monetary or fiscal policy may be necessary to stabilize the economy. Thus, D correctly describes the effects of wage and price stickiness on the economy. A and B are incorrect because wage and price stickiness results in a horizontal SRAS curve, not a vertical one, and C is too vague as it could apply to any situation of disequilibrium in the market.

Wage and Price Stickiness