Final answer:
The term 'ratchet effect' refers to the economic phenomenon where prices, such as wages, tend to go up easily but do not decrease as readily, even when market conditions change. It is not related to a price ceiling, which is a set upper limit to price. The ratchet effect is important for understanding certain inflationary patterns and the behavior of economic agents.
Step-by-step explanation:
The idea that the price level readily moves upward but not downward is called the ratchet effect. The ratchet effect is a phenomenon in economics that describes situations where prices can easily increase but face resistance when it comes to decreasing. This effect can often be observed in wage and price settings, where, for example, nominal wages tend to increase but seldom decrease even when market conditions may suggest a downward adjustment.
Understanding the ratchet effect is important in the context of inflationary pressures and monetary policy. As illustrated by the scenario where an increase in the money supply is anticipated, workers and employers adjust their behavior based on expectations. If workers demand higher wages based on expected price increases, and employers agree because they anticipate higher revenues as well, this can result in an upward shift in the short-run aggregate supply curve without a corresponding increase in real GDP.
The concept is distinct from a price ceiling, which is a regulation that prevents a price from rising above a set level, but the ratchet effect refers to a broader economic tendency for prices to stick upwards rather than an imposed limit.