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In: Economics

Explain the slope of the short-run aggregate-supply curve using the sticky-wage theory.

Explain the slope of the short-run aggregate-supply curve using the sticky-wage theory.

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Expert Solution

The slope of the short run supply curve is upward sloping. It means that, with increase in prices, the supply of goods and services increases, and it can be explained by the sticky wage theory. As per the sticky wage theory, the wages are sticky in the short run as employees are bound to work under the contract. Here, the contract specifies the wages being paid in nominal terms and that are fixed. Hence, there is an increase in the prices, But wage remains sticky and does not change. It causes the real value of the wage to come down with the increase in the price level and though the productivity remains the same. It makes labor to become cheaper and it causes the firms to hire more workers and increase the production level so that profit is maximized. Hence, with an increase in the price level, the supply of goods & services, increase and sticky wages of workers play an important role.

Rahul Sunny answered 1 year ago
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