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Sticky Prices and Wages Changes in real GDP occur in response to price level changes over short periods of time when input prices rise more slowly than output prices

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Sticky Prices and Wages

Changes in real GDP occur in response to price level changes over short periods of time when input prices rise more slowly than output prices. Because real GDP responds to changes in the price level in the short run, the short-run aggregate supply curve is upward sloping. Economists use the phrases “sticky wages” and “sticky prices” to refer to the slow response of wages and other input prices, as well as some output prices, to price level changes. To help understand why prices and wages may be sticky, let’s use the example of “Bill’s Glue Emporium,” a firm that sells other adhesives to businesses. Assume the price level increases by 10 percent in 2018. Bill does not plan to buy new equipment or tools during the year and the wages of Bill’s workers will not be adjusted until the end of the year. Explain why Bill would choose the following alternative responses to the price level change?

Bill increases the price and output of his glue during 2018 but reduces output to its previous (2017) level in 2019.