wage and price stickiness causes quizlet

Empirical evidence on the extent, causes and consequences of wage rigidity on the individual level is relatively scant, however. Unformatted text preview: Question 1 All of the following statements are true about the short-run aggregate supply curve except Select one: a. it is a graphical representation of the relationship between production and the price level.b. Assume that at this initial point, the growth rate of the money supply is 5%, the growth rate of the velocity of money is 0% and inflation is 1%. However, because of sticky wages and prices, the wage remains at its original level (W 0) for a period of time and the price remains at its original level (P 0). There is a surplus of Q3-Q2. As well as wages being sticky, prices can be sticky. Keynes argued that, if workers in general were to accept lower money wages, the overall price level could not possibly remain unchanged. However, because of sticky wages and prices, the wage remains at its original level (W 0) for a period of time and the price remains at its original level (P 0). This Feature it is a result of the stickiness or inflexibility of some prices and wages. Assume that wages and prices are sticky and that we start at a long-run equilibrium. Firms may pay wages above the market-clearing wage to ensure hard work from its employees and to hold on to their work. c. it is upward-sloping. d. it is drawn holding price level constant. Around 15% of wage changes are wage cuts, around 40% of price changes are price cuts. By combining stickiness with problems of co­ordinating, this theory can explain the cause of wage stickiness. Though, prices do tend to be more flexible than wages. Wage rigidity – the observation that wages cannot be adjusted downwards – has important implica-tions for labour markets and macroeconomic performance. This causes the growth rate of consumption and the growth rate of investment to fall. Money illusion is an economic theory stating that many people have an illusory picture of their wealth and income based on nominal dollar terms, rather than real terms. Real prices … This study found wage stickiness is more pronounced than price stickiness. Economists argued that prices and wages are “sticky… The price level, in turn, depended on money-wage bargains made between many different groups of workers and employers across the economy as a whole. Price above equilibrium. To see how nominal wage and price stickiness can cause real GDP to be either above or below potential in the short run, consider the response of the economy to a change in aggregate demand. Sticky prices are prices that do not adjust immediately to changing economic conditions. In other cases, the price may be set above the equilibrium price – leading to excess supply and a surplus. 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