Empirical evidence on the extent, causes and consequences of wage rigidity on the individual level is relatively scant, however. At a price of P2, the supply is greater than demand, meaning firms have excess stock they cannot sell. 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%. Sticky prices are prices that do not adjust immediately to changing economic conditions. This Feature Assume that wages and prices are sticky and that we start at a long-run equilibrium. Economists argued that prices and wages are “sticky… Around 15% of wage changes are wage cuts, around 40% of price changes are price cuts. c. it is upward-sloping. This study found wage stickiness is more pronounced than price stickiness. By combining stickiness with problems of co­ordinating, this theory can explain the cause of wage stickiness. New Keynesian Economics is a modern twist on the macroeconomic doctrine that evolved from classical Keynesian economics principles. Although this theory explains the problem of unemployment yet does not explain why nominal wage is slow to change. Price above equilibrium. This causes the growth rate of consumption and the growth rate of investment to fall. it is a result of the stickiness or inflexibility of some prices and wages. 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). Keynes argued that, if workers in general were to accept lower money wages, the overall price level could not possibly remain unchanged. 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. In other cases, the price may be set above the equilibrium price – leading to excess supply and a surplus. 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. Though, prices do tend to be more flexible than wages. As well as wages being sticky, prices can be sticky. Real prices … 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). Wage rigidity – the observation that wages cannot be adjusted downwards – has important implica-tions for labour markets and macroeconomic performance. d. it is drawn holding price level constant. Firms may pay wages above the market-clearing wage to ensure hard work from its employees and to hold on to their work. 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