In an economic downturn, sticky wages and prices reduce the economy's speed of adjustment because
A) businesses are unable to adjust quickly to changes in aggregate demand.
B) they cause deflation.
C) hyperinflation will likely occur.
D) union workers would likely quit and look for work elsewhere.

Question

Quizplus · Accepted Answer

Sticky wages and prices refer to the phenomenon where wages and prices do not decrease immediately in response to a decrease in aggregate demand. This can make it difficult for businesses to adjust their production levels and can prolong the economic downturn. Workers are usually unwilling to accept lower wages, and businesses may be hesitant to lower their prices due to the fear of losing market share to competitors. This all slows down the economy's adjustment process. The other choices (B, C, and D) are incorrect as they do not accurately describe the effects of sticky wages and prices on the economy during an economic downturn.

In an Economic Downturn, Sticky Wages and Prices Reduce the Economy's