Question

4. What is wage and price stickiness? How does it impact Aggregate demand and Aggregate supply in both the short and long run?

Answer 1

Wage and price stickiness means that the wages and price do not change frequently as the other values in the market change for example, price of the good. It is more sticky or resist changes downwards.

If the price of the goods decreases the wages should follow but as they are sticky the wages will not come down easily leading to a higher real wage and forcing job cut. In the short run, it allows the firm to increase the production and hire more because as the price increase the real wages fall and at a lower real wages more labor can be hired.

In the long run, it doesn't affect the variables as all flexible and change frequently.