Chapter 4R, Problem 5MCQ

To determine

To determine the shape of the short-run aggregate supply curve due to sticky wage assumption.

Explanation of Solution

Due to the sticky nominal wage assumption, the short-run aggregate supply curve is upward-sloping and not downward-sloping. Hence, option ( c) is the correct answer.

A sticky nominal wage does not shift the aggregate supply curve anywhere, neither to the right nor left. A supply curve shifts only when external factors change. In a two-dimensional space nominal wage is the independent variable that determines aggregate supply. It is an internal factor. Hence options (a) and (b) are incorrect.

The relationship between supply and its price is positive as per the law of supply. Hence, the aggregate supply curve cannot be down due to sticky wages. When wages are sticky, more can be supplied only at a higher wage. Therefore, the short-run aggregate supply curve cannot be negative. Option (d) is incorrect.

Lastly, a vertical aggregate supply curve indicates full employment. The supply becomes independent of the wage rate. It can be a long-run position, not a short-run phenomenon. Hence, option ( e) is incorrect.

Economics Concept Introduction

A sticky nominal wage assumption in the short run says that wages will not fall beyond a limit. This is a strong assumption and is the key determinant of the shape of the short-run aggregate supply curve.