In the short run,a monetary contraction leads to increased unemployment because:
A) wages and prices are sticky.
B) wages and prices are flexible.
C) wages are sticky,while prices are flexible.
D) wages are flexible,while prices are sticky.

Question

Quizplus · Accepted Answer

In the short run, wages and prices are sticky, meaning they do not adjust quickly to changes in the economy. A monetary contraction leads to higher interest rates, which in turn reduces spending and aggregate demand. With lower demand for goods and services, firms produce less and have less need for workers. However, since wages and prices are sticky, they do not adjust downward immediately. This results in a temporary imbalance in the labor market, where there is an excess supply of labor (unemployment) and lower production levels.

In the Short Run,a Monetary Contraction Leads to Increased Unemployment