Question

The sticky-price theory helps explain what feature of the aggregate demand and aggregate supply model?

Answer 1

Answer:

The stick price theory helps to explain the upward sloping shape of the aggregate supply curve.

Explanation:

The price tends to be sticky for a number of reasons.  

1. Firms will need to incur menu costs if they constantly change prices
2. Frequent change in prices may annoy the customers
3. The wage rates remain the same even after change in price because the  wages are based on contracts

The short-run aggregate supply curve is upward sloping because of the stickiness of price, there is a positive and direct relationship between output and price. Due to the high expected price level in the short run, the firms will expect the input prices to rise along with an increase in the product price.  

To counter the increase in inputs price, the product price is kept high. The higher price provides motivation to produce more. That's why the short-run aggregate supply curve is upward sloping.