Explain Why Flexible Prices (Or Itsabsence) Is a Linchpin (A

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The Answer is In the Keynesian framework a drop in demand in the economy results in only one variable changing - output, because the other variable, prices, is sticky and cannot act as a "safety valve" to relieve the pressure from the drop in demand - instead, output must absorb the shock fully in order for equilibrium to be restored. In China, the"great economic shock absorber" the labor force might accept a lower wage, work longer hours, be relocated and change the type of employment quickly. In a GDP sense, output need not fall as much given the negative shock because there is this additional shock absorber.

Explain Why Flexible Prices (Or Itsabsence) Is a Linchpin (A

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Explain Why Flexible Prices (Or Itsabsence) Is a Linchpin (A

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Correct Answer:
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