Question

The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more than expected,
Group of answer choices
production is more profitable and employment rises.
production is more profitable and employment falls.
production is less profitable and employment rises.
production is less profitable and employment falls.

Answer 1

Answer:

The correct answer is option: production is more profitable and employment rises.

Explanation:

The sticky wage theory states that as price level changes the nominal wages do not change instantly, because of wage contracts.

So when the price level increases, the cost of production does not. So production and employment become more profitable.

This causes firms to increase production and employment. So the output level or supply of the firm will increase.