Principles of Economics- Mankiw (5th) 694

Principles of Economics- Mankiw (5th) 694 - 718 PA R T T W...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
718 PART TWELVE SHORT-RUN ECONOMIC FLUCTUATIONS To see the implications of sticky prices for aggregate supply, suppose that each firm in the economy announces its prices in advance based on the economic con- ditions it expects to prevail. Then, after prices are announced, the economy expe- riences an unexpected contraction in the money supply, which (as we have learned) will reduce the overall price level in the long run. Although some firms reduce their prices immediately in response to changing economic conditions, other firms may not want to incur additional menu costs and, therefore, may tem- porarily lag behind. Because these lagging firms have prices that are too high, their sales decline. Declining sales, in turn, cause these firms to cut back on production and employment. In other words, because not all prices adjust instantly to changing conditions, an unexpected fall in the price level leaves some firms with higher-than-desired
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.
Ask a homework question - tutors are online