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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