Question

Identify the details of each of the following explanations for an upward- sloping SRAS curve: a. Sticky-wage explanation b. Worker-misperception explanation

Short answer

The Sticky-wage explanation suggests that wage rates are slow to adjust to new economic conditions, therefore when the price level falls, the real wage exceeds the market-clearing level leading to a decrease in employment and a decrease in output. On the other hand, the Worker-misperception explanation suggests that when the actual price level is above the expected price level, workers mistakenly believe that the relative price of the labor they supply has increased and supply more labor, which firms happily use to produce more output.

Step-by-step solution

Understand an Upward Sloping SRAS Curve

SRAS curve is upward sloping. This means as the price level increases, the quantity of goods and services supplied also increases.

Explanation of the Sticky-Wage Theory

The Sticky-Wage Theory suggests that the short-term contracts for workers and employees make some wages slow to respond to changes in the economy. When the price level falls, employment will decrease, and thus the quantity of goods and services supplied also decreases, leading to an upward sloping SRAS curve.

Explanation of the Worker-Misperception Theory

The Worker-Misperception Theory suggests that if the price level is higher than what workers expected, it affects their decision to supply labor. They may work more, thereby increasing the quantity of goods and services supplied. On the other hand, if the price level is less than what workers expected, they may work less, thereby decreasing the quantity of goods and services supplied. As a result, the SRAS curve slopes upward.