Suppose the price level falls but because of fixed nominal wage contracts the real wage rises and firms cut back on production This is a demonstration of the ?
Correct answer: A. sticky-wage theory of the short-run aggregate supply curve
- A. sticky-wage theory of the short-run aggregate supply curve
- B. classical dichotomy theory of the short-run aggregate supply curve
- C. misperceptions theory of the short-run aggregate supply curve
- D. sticky-price theory of the short run aggregate supply curve
Explanation
With nominal wages fixed by contracts, a fall in the price level raises firms’ real wage costs, so they reduce production. This is the sticky-wage explanation for the upward-sloping short-run aggregate supply curve.
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The economy is studied as a whole through national income, gross domestic product, inflation, unemployment, economic growth and business cycles. Coverage includes aggregate demand and supply, consumption and investment, money and banking, fiscal and monetary policy, exchange rates and balance of payments, which distinguishes macroeconomics from the study of individual markets.
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