For example, the sticky-wage theory asserts that output prices adjust more quickly to changes in the price level than wages, in part because of long-term wage contracts. Suppose a firm signs a contract agreeing to pay its workers $15 per hour for the next year, based on an expected price level of 100. If the actual price level turns out to be 110, the firm's output prices will ___ , and the wages the firm pays its workers will remain fixed at the contracted level. The firm will respond to the unexpected increase in the price level by _ the quantity of output it supplies. If many firms face similarly rigid wage contracts, the unexpected increase in the price level causes the quantity of output supplied to ___ Correct the natural level of output in the short run.

The sticky wage theory is based on the fact that everyone's wages tend to change more slowly than other changes in the economy. This question uses the example of inflation, but the sticky wage theory also applies for unemployment rate. If unemployment rate increases, the wages of currently employed individuals will not decrease, they might even increase a little bit. This is true even for CEOs, remember when the CEOs of General Motors and Chrysler still earned tens of millions of dollars while their companies went bankrupt?