Principles of Economics, 7th Edition

Published by South-Western College
ISBN 10: 128516587X
ISBN 13: 978-1-28516-587-5

Chapter 33 - Part XII - Aggregate Demand and Aggregate Supply - Questions for Review: 5

Answer

Three famous theories that explain the sloping of the aggregate supply upwards are: the stick wage theory- lowered price levels causes employment and production to be less profitable. The problem is the fact that wages do not adjust immediately to the price level, so the firm reduces the quantity of goods and services produced. sticky- price theory- unexpected changes in price level can cause firms to have non desired prices. This causes firms to lose sales and causes a reduction in goods and services. Misperception theory- lowered price levels cause the supplier to decrease supply of goods and services when they really should not.

Work Step by Step

This question refers to the three theories of supplies. Consider the fact that wages and prices are "sticky" and understand that it takes time to adjust.
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