The sticky-price theory implies that:

• A. all prices in the economy are perfectly flexible and adjust instantly to changes in demand and supply
• B. some prices adjust slowly in response to changes in economic conditions, leading to short-run fluctuations in output and employment
• C. wages are the only prices that remain fixed in the short run
• D. government intervention is unnecessary because markets always clear immediately

Answer: (B)

Verified step by step guidance

1. Understand that the sticky-price theory is a concept in macroeconomics explaining why prices do not adjust immediately to changes in economic conditions.
2. Recognize that according to the sticky-price theory, some prices are 'sticky,' meaning they adjust slowly rather than instantly, which can cause short-run fluctuations in output and employment.
3. Note that this theory contrasts with the idea of perfectly flexible prices, where all prices adjust immediately to clear markets.
4. Identify that sticky prices can result from menu costs or contracts that prevent firms from changing prices frequently.
5. Conclude that the sticky-price theory implies that not all prices are flexible, and this price rigidity can lead to temporary deviations from full employment and output levels.