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True or False: The more 'sticky' nominal wages and other input costs are, the steeper...

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lilylee | Student, College Freshman | (Level 1) Salutatorian

Posted June 26, 2013 at 11:04 PM via web

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True or False: The more 'sticky' nominal wages and other input costs are, the steeper the slope of the aggregate supply curve and therefore, the less effective increasing aggregate demand will be in terms of affecting real output.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted June 27, 2013 at 12:00 AM (Answer #1)

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This statement is true.  There are two aspects to it and both of them are true.

When wages are sticky, the aggregate supply curve slopes upward.  Let us examine why this is so.  When prices rise, wages remain sticky and do not rise.  This means that companies are getting higher prices when they sell their goods but are not having to pay more for their labor.  This means that labor is cheaper relative to output.  For this reason, businesses will hire more people and produce more things.  This means that supply will increase.  The more wages stick, the steeper the slope will be.

When the aggregate supply curve has a steep slope, increases in aggregate demand will not increase real output very much.  We can understand this by looking at an aggregate supply-aggregate demand graph.  When the aggregate supply curve is very steep, an increase in aggregate demand leads to a large increase in the price level but only a small increase in real output.

Thus, both aspects of this statement are true and the statement as a whole is true as well. 

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