What happens if wages and prices adjust very slowly in response to the various shocks to the economy? Does this make business cycle, i

Business Dec 23, 2020

What happens if wages and prices adjust very slowly in response to the various shocks to the economy? Does this make business cycle, i.e. expansions and contractions in the economy, shorter or longer?

Expert Solution

In the short-run, a market generally fluctuates its factors very fast due to uncertainties present in the economy. Suppose an economy is experiencing very slow adjustment in the prices and wages due to market shocks. In that case, it implies that the economy is in the contraction phase of the business cycle. It is the time period when people make fewer economic activities and slow down the economy for some time.

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