In its basic structure, the FRB/US model follows a standard macro
economic assumption that firms cannot instantaneously adjust nominal
prices and wages. While wages in the model adjust slowly, they do not
exhibit downward nominal rigidity. Nevertheless, because of nominal
price and wage stickiness, changes in household demand and spending
affect the amount firms produce for a given level of prices. As a result,
monetary policy, which affects demand, can cause changes in employ-
ment and output before prices have time to fully adjust. Thus, sluggish
nominal adjustment creates a channel through which monetary policy
has temporary real effects on the economy. In the long run, however,
when prices fully adjust, monetary policy induces changes only to the
level of prices. In other words, monetary policy determines the long-
run inflation rate.