Demand shocks cause problems in the macroeconomy primarily because prices are sticky.

Question

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When there is a sudden increase in demand for goods and services, prices cannot adjust quickly due to price stickiness. This results in excess demand, leading to shortages and inflation. Similarly, when there is a sudden decrease in demand, prices cannot adjust quickly, leading to excess supply, resulting in unemployment and deflation. Therefore, demand shocks can cause significant problems in the macroeconomy due to price stickiness.

Demand Shocks Cause Problems in the Macroeconomy Primarily Because Prices