An assumption of _______ is more plausible for studying the short-run behavior of the economy, while an assumption of ______ is more plausible for studying the long-run, equilibrium behavior of the economy.
A) deflation; inflation
B) inflation; deflation
C) flexible prices; sticky prices
D) sticky prices; flexible prices

Question

Quizplus · Accepted Answer

In the short run, prices and wages are often "sticky" due to contracts and adjustments costs, making it difficult for them to adjust quickly to changes in supply and demand. Over the long run, however, prices and wages are more flexible, allowing them to adjust to economic conditions, leading to an equilibrium state.

An Assumption of _______ Is More Plausible for Studying the Short-Run