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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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BuyFindarrow_forward

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

Why do sticky wages and prices increase the impact of an economic downturn on unemployment and recession?

To determine

Impact on economic downturn on unemployment and recession due to sticky wages and prices is to be determined.

Explanation

This rigidness of prices and wages occurs due to coordination argument. Coordination argument says that during bad economic times, people are willing to accept lower wages but there is no way to apply planning of coordinated wage reductions by market oriented economy.

As wages cannot be reduced, employers lay-off their employees, leading to increase in unemployment rate.

Prices are sticky in macro-terms. There are certain cost attached to altering of prices which are called menu-cost...

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