The so-called ratchet effect refers to the characteristic in the economy where product prices, wages, and per-unit production cost are flexible when
A)AD decreases but not when AD increases.
B)AD increases but not when AD decreases.
C)AS increases but not when AS decreases.
D)AD shifts but not when AS shifts.

Question

Quizplus · Accepted Answer

The ratchet effect describes a situation where prices and wages are flexible upwards when aggregate demand (AD) increases, but they are sticky downwards when AD decreases, meaning they do not easily fall back to previous levels.

The So-Called Ratchet Effect Refers to the Characteristic in the Economy