If prices of goods and services are free to quickly adjust, then:
A) A negative demand shock would lead to increased unemployment in the short run
B) A positive demand shock would lead to increased unemployment in the short run
C) A negative demand shock would have no short-run effect on unemployment
D) There would be no short-run demand shocks

Question

Quizplus · Accepted Answer

If prices of goods and services are free to quickly adjust, then a negative demand shock would cause prices to fall, leading to increased demand for those goods and services, and increased employment in the short run. Therefore, there would be no short-run effect on unemployment. On the other hand, a positive demand shock would cause prices to rise, leading to decreased demand for those goods and services, and decreased employment in the short run.

If Prices of Goods and Services Are Free to Quickly