In the medium run the aggregate supply curve is upward sloping since
A)workers immediately realize that nominal wage increases are really the result of price increases
B)firms encounter costs in resetting prices and are reluctant to change wages following a change in aggregate demand
C)wages and prices always immediately change in proportion to the money stock
D)there is always natural friction in the labor market that prevents unemployment from reaching zero
E)none of the above

Question

Quizplus · Accepted Answer

In the medium run, firms may encounter costs in resetting prices and may be reluctant to change wages immediately in response to changes in aggregate demand. This leads to an upward sloping aggregate supply curve. Option A is incorrect because nominal wage increases may not always result in price increases immediately. Option C is incorrect because wages and prices don't always change in proportion to the money stock. Option D is incorrect because frictional unemployment may exist even if the labor market is operating efficiently.

In the Medium Run the Aggregate Supply Curve Is Upward