Macroeconomic Externality
What is a Macroeconomic Externality?
Written by J. Mance Gordon
Updated at April 23rd, 2024
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What is a Macroeconomic Externality?
A macroeconomic externality is where what happens at the macro level is different from and inferior to what happens at the micro level. For example, a firm should respond to a decrease in demand for its product by cutting its price to increase sales. However, if all firms experience a decrease in demand for their products, sticky prices in the aggregate prevent aggregate demand from rebounding (which we would show as a movement along the AD curve in response to a lower price level).
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