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Occupational Health and Safety, Canadian Edition

15th Edition
by David L. Goetsch, University of West Florida and Oskaloosa-Walton Eugene Ozon, Algonquin College
1035 Solutions 49 Chapters 1442 Studied ISBN: 0133450244 Computer Science 5 (1)

Chapters 24: DQ 10

10. Do prices tend to become more or less flexible as time passes? If there is a trend, how does it affect macroeconomists’ choice of models?


Step-By-Step Solution

10. Do prices tend to become more or less flexible as time passes? If there is a trend, how does it affect macroeconomists’ choice of models?

Answer: As the length of time increases so will the flexibility in prices. In the very short run prices tend to be completely inflexible. As time moves on prices become more and more flexible. This can be seen when an economy reacts to demand shocks with price changes as well as with output and employment changes. If prices are stuck we use the aggregate expenditure model, which assumes perfectly inflexible prices (and wages) but if prices are flexible the aggregate demand and aggregate supply model should be used.

We need different models precisely because the economy behaves so differently depending on how much time has passed after a demand shock. The differences in behavior result from the fact that prices go from stuck in the extreme short run to fully flexible in the long run. Using different models for different stages in this process gives us much better insights into not only how economies actually behave but also how various government and central bank policies may have different effects in the short run when prices are fixed versus the long run when prices are flexible.


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