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Chapter 6: Q6. (page 129)

True or False. Because price stickiness matters only in the short run, economists are comfortable using just one macroeconomic model for all situations.

Short Answer

Expert verified

The statement is false.

Step by step solution

01

Meaning of price stickiness

Prices are sticky only in the short run.As time rolls on, the firms have to change the prices for their products to maintain the equilibrium between demand and supply. If the firms keep up the high prices for longer, the demand will fall short of the supply, and the economy will face overproduction. On the contrary, the low prices will pull the demand upward, and there will be underproduction in the economy.

Therefore, to maintain the equilibrium in the long run, the prices must be flexible.

02

Reason for the false statement 

Since the prices are rigid in the short run and flexible in the long run, the firms鈥� demand and supply behave differently in the short run and long run. To analyze different demand and supply behaviors in the long and short run, firms need separate models.

Therefore, economists cannot use just one macroeconomic model for all situations.

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