Many economists believe that some wages and prices are "sticky downward" , meaning that these wages and prices increase quickly when demand is increasing but decrease slowly, if at all, when demand is decreasing. Discuss the consequences of this for the automatic mechanism that brings the economy back to potential GDP after an increase in aggregate demand. Would your answer change if aggregate demand decreased rather than increased? Explain.

Many economists believe that some wages and prices are "sticky downward" , meaning that these wages and prices increase quickly when demand is increasing but decrease slowly, if at all, when demand is decreasing. Discuss the consequences of this for the automatic mechanism that brings the economy back to potential GDP after an increase in aggregate demand. Would your answer change if aggregate demand decreased rather than increased? Explain.

Economics:

10th Edition

ISBN:9781285859460

Author:BOYES, William

Publisher:BOYES, William

Chapter8: Macroeconomic Equilibrium: Aggregate Demand And Supply

Section: Chapter Questions

Problem 20E

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