Business, 12.03.2020 01:57 maisieisdabomb23

For example, the sticky-wage theory asserts that output prices adjust more quickly to changes in the price level than wages do, in part because of long-term wage contracts. Suppose a firm signs a contract agreeing to pay its workers $15 per hour for the next year, based on an expected price level of 100. If the actual price level turns out to be 110, the firm's output prices willrise , and the wages the firm pays its workers will remain fixed at the contracted level. The firm will respond to the unexpected increase in the price level byreducing the quantity of output it supplies. If many firms face similarly rigid wage contracts, the unexpected increase in the price level causes the quantity of output supplied tofall below the natural level of output in the short run.

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