Final answer:
Sticky wages and prices exacerbate the effects of an economic downturn by causing higher unemployment and deepening recessions because they do not adjust quickly to a decrease in demand, resulting in an excess supply of labor and goods.
Step-by-step explanation:
Sticky wages and sticky prices increase the impact of an economic downturn on unemployment and recession because they do not adjust quickly to changes in demand. In the labor market, when demand for labor decreases, the sticky wages mean that businesses cannot reduce their wage bills by lowering wages. Instead, they often have to lay off workers, resulting in higher unemployment. Likewise, in the goods market, sticky prices prevent the adjustment to a decrease in demand, leading to an excess supply of goods, which is equivalent to lower sales and potential cuts in production, contributing further to unemployment.
When the economy experiences a downturn and the demand for both labor and goods falls, the inability of wages and prices to fall immediately to reflect this decrease in demand means that there is an excess supply of both labor and goods. This mismatch between supply and demand leads to higher levels of unemployment and a recession, as businesses are saddled with labor and inventory costs that are too high relative to the current economic conditions. The persistence of higher wages and prices during an economic downturn, without the corresponding demand, hence exacerbates the downturn's negative effects on employment and economic growth.