ECN 204 Lecture Notes - Lecture 2: Nominal Rigidity, Aggregate Supply, Full Employment
14 Feb 2018
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What causes sticky prices: companies selling final goods and services know that consumers prefer stable, predictable prices that do not fluctuate rapidly. In certain situations, a firm may be afraid that cutting its prices may be counterproductive: menu costs the extra cost incurred when printing new menus, rivals may attempt to match the price cuts price wars. In reality, many prices in the economy are inflexible and do not change rapidly when demand changes unexpectedly: manufacturing firms typically attempt to deal with unexpected changes in demand by maintain an inventory. Categorizing macroeconomic models: price stickiness moderates over time. Inventory: goods that have been produced but remain unsold. If demand falls across the entire economy for an extended period of time, then many firms will find inventories piling up and will be forced to cut production resulting in recession, with gdp falling and unemployment rising.
