Final answer:
In macroeconomics, the short run assumes input prices are inflexible, while output prices are flexible. The economic variables behave differently in the short term due to stickiness of input prices, although they adjust over the long term.
Step-by-step explanation:
The correct option is D:
In macroeconomics, the short run assumes that input prices are inflexible, while output prices are flexible. In the context of macroeconomics, the 'short run' refers to a period in which certain economic variables, namely input prices such as wages, are considered to be sticky or inflexible. This means they do not adjust immediately to changes in market conditions. Conversely, output prices can fluctuate more freely in response to shifts in aggregate demand or supply. This is because businesses can adjust prices of their final goods and services more quickly than they can renegotiate input costs.
In most markets, this short-term stickiness of input prices is a result of contracts, habits, or regulations that prevent swift adjustments. Over time, such as in the long run, these input prices become more flexible. This flexibility allows the macroeconomy to adjust back to its level of potential GDP. If aggregate demand increases or decreases, the economy adapts through changes in output and employment levels primarily determined by aggregate demand in the short run and by aggregate supply in the long run.
Understanding the distinction between price flexibility in the short run and the long run is crucial for determining appropriate fiscal and monetary policies to address economic fluctuations. It explains why the same policy can have different impacts depending on the timeframe in which it is applied and the existing economic conditions.