According to Keynesian theory, SRAS curve is positively sloped, because
A) employers and employees fail to predict prices correctly.
B) employers and employees have misperception about the change in relative price level.
C) labour contracts are signed for a period in which labour market conditions are not known.
D) wages are flexible, but prices are not.

Question

Quizplus · Accepted Answer

Keynesian theory states that wages are sticky or delayed in adjusting to changes in the general price level. This means that if there is an increase in demand for labor, it will initially translate into higher employment instead of higher wages, and vice versa. These labor market conditions are not known in advance, as labor contracts are usually signed for a period of time. As a result, the SRAS curve is positively sloped, because employers and employees adjust their output in response to unexpected changes in the price level.

According to Keynesian Theory, SRAS Curve Is Positively Sloped, Because