The sticky-wage theory of the short-run aggregate supply curve says that when the price level is lower than expected,
A)production is more profitable and employment rises.
B)production is more profitable and employment falls.
C)production is less profitable and employment rises.
D)production is less profitable and employment falls.

Question

Quizplus · Accepted Answer

According to the sticky-wage theory, when the price level is lower than expected, firms are initially unable to adjust their workers' wages downwards. This implies that production costs remain high, while the price they receive for output falls, making production less profitable. As firms respond to this decline in profitability, they will cut back on production and demand for labor will fall, causing employment to decline as well. Hence, option D is the correct answer.

The Sticky-Wage Theory of the Short-Run Aggregate Supply Curve Says