In the sticky-wage model,if labour contracts specify that the nominal wage be fully indexed for inflation,the short-run aggregate supply schedule will:
A) slope upward to the right.
B) be vertical.
C) be horizontal.
D) shift upward.

Question

Quizplus · Accepted Answer

If labour contracts specify that the nominal wage is fully indexed for inflation, then a rise in the price level will immediately lead to an equal rise in nominal wages. Hence, there will be no change in the real wage, and firms will have no incentive to change their level of employment. As a result, the short-run aggregate supply will be vertical.

In the Sticky-Wage Model,if Labour Contracts Specify That the Nominal