When prices are inflexible, the economy will respond to demand shocks through short-run changes in output and unemployment.

True / False.

True

Explanation:

Under normal conditions, firms organize to produce according to consumer needs. When a demand shock occurs, there is an abrupt increase in demand for a product. In this scenario the price increases, serving as a natural mechanism of market adjustment. When the price increases, the quantity demanded tends to decrease, returning to a level of equilibrium. However, when prices are inflexible, this adjustment mechanism does not work. Thus, to meet rising demand, firms in the short term tend to increase the amount of employment and production so that a shortage of products does not occur.