Wage and price stickiness

Question

Quizplus · Accepted Answer

Wage and price stickiness create inflexibility in the factor and product markets, which prevent the economy from adjusting to its potential level of output in the short run, causing a gap between actual and potential output. This results in a sloping short-run aggregate supply curve, as opposed to a vertical one. However, in the long-run, as wages and prices become more flexible, the economy can adjust to its potential output, resulting in a vertical long-run aggregate supply curve.

Wage and Price Stickiness