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Sticky prices cause shortterm problems from "summary" of EBOOK: Macroeconomics by Rudiger Dornbusch,Stanley Fischer,Richard Startz

Prices that do not adjust quickly to changes in supply and demand are called sticky prices. When prices are sticky, they can cause short-term problems in the economy. One reason for this is that sticky prices can lead to surpluses or shortages in markets, which can in turn lead to inefficient allocation of resources. For example, if the price of a good is sticky and does not adjust quickly to changes in demand, there may be excess supply in the market, leading to a surplus. This surplus can result in wasted resources, as producers are not able to sell all of their goods at the current price. On the other hand, if the price is too low due to sticky prices, there may be excess demand, leading to shortages and unmet consumer needs. Another way in which sticky prices can cause short-term problems is through their impact on wages. When prices are sticky, wages may also be slow to adjust. This can lead to imbalances in the labor market, with some workers being overpaid while others are underpaid. This can result in inefficiencies and reduced productivity in the economy. Furthermore, sticky prices can also have an impact on the effectiveness of monetary policy. When prices are slow to adjust, changes in the money supply may not have the desired effect on the economy. For example, if the central bank tries to stimulate the economy by increasing the money supply, but prices are sticky and do not adjust, the intended stimulus may not be fully realized.
  1. While sticky prices are a common feature of many markets, they can cause short-term problems in the economy. These problems include inefficient allocation of resources, imbalances in the labor market, and challenges in implementing monetary policy. It is important for policymakers to be aware of the effects of sticky prices and take them into account when designing economic policies.
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EBOOK: Macroeconomics

Rudiger Dornbusch

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