What is meant by the term 'normal rigidities'?
replied to: coffeym
Replied to: What is meant by the term 'normal rigidities'?
This term refers to the 'stickiness' of prices and wages. The concept of normal rigidities says that prices change slowly, as it costs businesses more to lower prices than they can potentially earn from increased sales.
replied to: JSDonald
Replied to: This term refers to the 'stickiness' of prices and wages....
Consumers will have more income due to lowered prices, but they can spend it on any product they choose.
replied to: Ruzhyo
Replied to: Consumers will have more income due to lowered prices, but they...
The term is "nominal rigidities", not "normal", and it has to do with the downward-sticky nature of wages. (Two explanations for this are money illusion and efficiency wages.) In "The General Theory", Keynes suggested that this-- nominal rigidities-- was a sufficient, but certainly not necessary, condition for an economy to become bogged down in a state of underemployment equilibrium, due to the fact that because wages are downward-sticky, the labour market will not clear sufficiently so that the economy might "self-correct" and return to full-employment (equilibrium).