Negative demand shocks have a more signiﬁcant impact on output and employment when prices
are ﬂexible.

Question

Quizplus · Accepted Answer

When prices are flexible, the economy can adjust more quickly to negative demand shocks, allowing for a quicker recovery in output and employment. In contrast, when prices are sticky or inflexible, negative demand shocks can lead to more significant and prolonged impacts on output and employment.

Negative Demand Shocks Have a More Signiﬁcant Impact on Output