In the Keynesian model,
A)the short-run aggregate supply slopes upward because of price misperception by firms.
B)the short-run aggregate supply slopes upward because the actual price may be different from the expected price during the term of wage contract.
C)the short-run aggregate supply is horizontal because of price misperception by firms.
D)the short-run aggregate supply is horizontal because the actual price may be different from the expected price during the term of wage contract.

Question

Quizplus · Accepted Answer

According to the Keynesian model, the short-run aggregate supply curve slopes upward because firms may have already entered into wage contracts based on expected prices, which may be different from the actual prices they face in the short run. As a result, firms may increase output if the actual price level is higher than expected, leading to an upward sloping short-run aggregate supply curve. This is known as the sticky-wage theory. Option A and Option C are incorrect because they mention price misperception, which is a different concept than sticky wages. Option D is incorrect as it suggests that the aggregate supply is horizontal, which is a characteristic of the long-run aggregate supply curve in the Keynesian model.

In the Keynesian Model