If output is above its natural rate, then according to sticky-wage theory
A) workers and firms will strike bargains for lower wages. In response to the lower wages firms will produce less at any given price level.
B) workers and firms will strike bargains for lower wages. In response to the lower wages firms will produce more at any given price level.
C) will strike bargains for higher wages. In response to the higher wages firms will produce less at any given price level.
D) workers and firms will strike bargains for higher wages. In response to the higher wages firms will produce more at any given price level.

Question

Quizplus · Accepted Answer

According to sticky-wage theory, when output is above its natural rate, firms become more profitable, and workers demand higher wages. However, due to the stickiness of wages in the short run, wages may not adjust quickly enough to equate the demand for and supply of labor. This can lead to a temporary mismatch between labor demand and supply, resulting in unemployment. In response to the higher wages demanded by workers, firms will produce less at any given price level, leading to a decrease in output. Thus, the correct choice is C.

If Output Is Above Its Natural Rate, Then According to Sticky-Wage