When aggregate demand increases, the price level rises. but when aggregate demand decreases, the price level tends to be inflexible This decribes the ratchet effect.
The ratchet effect is a situation in which employees who are subject to performance pay decide to limit their output because they logically assume that businesses will react to greater output levels by increasing output requirements or reducing pay.
According to a phenomenon known as the "ratchet effect," employees whose pay is based on productivity purposefully limit their output in relation to their capacity because they predict that high levels of output will be followed by higher or "ratcheted-up" expectations in the future.
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