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

Question

Quizplus · Accepted Answer

The sticky-wage theory suggests that wages do not adjust immediately to changes in economic conditions. Therefore, if the price level rises more than expected, firms find their products more profitable (since prices are higher but wages have not yet adjusted), leading them to increase production, which in turn increases employment and output.

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