The sticky-wage theory of the short-run aggregate supply curve says that when the price level is lower than expected,
A)relative to prices wages are higher and employment rise.
B)relative to prices wages are higher and employment falls.
C)relative to prices wages are lower and employment rises.
D)relative to prices wages are lower and employment falls.

Question

Quizplus · Accepted Answer

According to the sticky-wage theory, wages are slow to adjust downward in response to lower prices, leading to higher nominal wages than expected. As a result, the cost of production for firms increases, leading to a decrease in employment and a leftward shift of the short-run aggregate supply curve. Therefore, when the price level is lower than expected, wages are higher, and employment falls.

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