Question

Explain why nominal wage is "sticky" in the short run, and why the short-run aggregate supply curve is upward sloping?

Explain why the long-run aggregate supply curve is a vertical line.

Part b (10 points)

In labor macroeconomics, the process to determine nominal wage between the employer (firm) and the workers, commonly known as the wage determination process is often illustrated as the following graph. Explain in words the wage determination process.

Hint: The wage determination process indicates how an increase/decrease in unemployment rate affects the nominal wage.

Nominal wage

  

Wage determination process

Unemployment rate

Answer 1

Wages are sticky in the short run as there are long term employment contracts between labour and the firm(employer) which cannot be revised in the short run , hence the wages are assumed to be sticky in the keynesian model.

In the classical model the wage and price flexibility basically ensures that the output does not change in the long run with respect to change in prices , so there is a vertical aggregate supply curve , however since the keynesian model assumes rigidity of wages so thus we get an upward sloping aggregate supply curve .

So the idea of what shape aggregate supply curve bascially relies on the assumption while the model is made.