Sticky prices combine with shocks to drive short-run fluctuations in output and employment. Consider a negative demand shock in which demand is unexpectedly low. Because prices are fixed, the lower-than-expected demand will result in unexpectedly slow sales. This will cause inventories to increase. If demand remains low for an extended period of time, inventory levels will become too high and firms will have to cut output and lay off workers. Thus, when prices are inflexible, the economy adjusts to unexpectedly low demand through changes in output and employment rather than through changes in prices

(which are not possible when prices are inflexible).