can arise if the frictions are combined with real rigidities arising from efficiency wages, customer markets, and the like. For example, substan tial nominal rigidity can arise from a combination of real rigidity in the labor market and imperfect competition and menu costs in the good market. If firms pay efficiency wages, for instance, then real wages may be set above the market-clearing level, so that workers are off their labor supply curves. In this situation a fall in labor demand can greatly reduce employment without a large fall in the real wage even if labor supply is inelastic The importance of real rigidities for explaining nominal rigidities is not settled, because there is no consensus about the sources an magnitudes of real rigidities in actual economies. In particular, phenom- na like efficiency wages and customer markets increase nominal rigidity to the extent that they reduce desired responses of real wages and real prices to demand shifts, but economists are still unsure of the sizes of these effects. Further research on real rigidities will lead to a better understanding of nominal rigidities Staggered Price Setting. Even when real rigidities are added, the models surveyed so far cannot fully explain the size and persistence of the real effects of nominal shocks. In these models the effects of shocks are eliminated when nominal prices adjust In actual economies, reces- sions following severe demand contractions can last for several years and while individual prices are fixed for substantial periods, these period are generally shorter than several years. Thus models with sticky prices must explain why the effects of shocks persist afterall prices are changed An explanation is provided by the literature on staggered price setting which shows that if firms change prices at different times, the adjustment of the aggregate price level to shocks can take much longer than the time between adjustments of each individual price. o The price levelinertia caused by staggering implies that nominal shocks can have large and long-lasting real effects even if individual prices change frequently. 10. John B. Taylor, " Stagger Review, vol 69(May 1979, Papers and Proceedings, 1978), pp. 108-13: Taylor, " Aggregate Dynamics and Staggered Contracts, Journal of Political Economy, vol. 88(February 1980), pp. 1-23; Olivier J. Blanchard, Price Asynchronization and Price Level Inertia, in Rudiger Dornbusch and Mario Henrique Simonsen, eds, Inflation, Debt, and indexation (MIT Press, 1983),pp 3-24; Olivier J. Blanchard, The Wage Price Spiral, ' Quarterly Journal of Economics, vol. 101(August 1986), pp. 543-65