Final answer:
The sticky-price theory attributes economic recession to the slow adjustment of wages and prices to decreased demand, leading to unemployment and surplus of goods. Wage stickiness, in particular, can be difficult due to the challenge of coordinating wage reductions across the market. Option A is correct.
Step-by-step explanation:
According to the sticky-price theory, the economy is in a recession because not all prices adjust quickly. This is indeed true. Sticky wages and prices increase the impact of an economic downturn on unemployment and recession because they do not adjust downward smoothly in response to decreased demand.
This inadvertently causes an excess supply of labor (unemployment) and goods (surplus), compounding the downturn. One key reason for wage stickiness, as identified by Keynes, is the coordination argument, which suggests that even if individuals are willing to take a wage cut, there is no easy way to implement coordinated wage reductions across the market.
When demand falls in the labor market (exemplified by a shift from D0 to D1), if wages remain at the original level (W0), fewer workers (Q1) are required compared to the original demand at that wage level (Q0), leading to unemployment.
Likewise, in the goods market, when demand decreases (shifting from D0 to D1) and prices do not fall immediately, the quantity of goods sold drops from Q0 to Q1, resulting in a surplus. Both unemployment and surplus goods signify a recessionary state within the economy.