“Macroeconomics is controversial. There is no single model upon whose validity all practitioners agree. One area of disagreement of particular importance is the behavior of money wages and money prices. If these are extremely flexible in their response to shocks to the economy, then so will be the general price level. If they are not, then the price level will be slow moving, or ‘sticky.’ This matters because the general price level is one of the key variables upon which the demand for money depends. If the price level is flexible, then it is free to move to absorb the consequences of shifts in exogenous factors such as the supply of money, and their effects on other variables, notably real income and employment, will be relatively muted. If the price level is sticky, those consequences will spill over onto real income and employment and cause them to fluctuate relatively more.” (p. 8)
KeywordsInterest Rate Price Level Money Supply Real Interest Rate Nominal Interest Rate
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