Question 9

Short-run AS is upward sloping because wages are sticky.

In the short run, aggregate supply (AS) is upward sloping primarily due to the stickiness of wages, which means that wages do not adjust immediately to changes in economic conditions. This stickiness can lead to firms increasing output and hiring more workers when demand rises, hence the upward slope of the short-run AS curve.

A) wages flexible

This option is incorrect because if wages were flexible, they would adjust quickly to changes in demand and supply, leading to a vertical long-run aggregate supply (AS) curve rather than an upward sloping short-run AS. Flexible wages would cause firms to not respond to demand changes as they would be able to adjust costs effectively.

B) wages sticky

This option is correct as it directly relates to the phenomenon being described. Sticky wages imply that wages do not adjust quickly to changes in the economy, which can cause firms to increase production when there is an increase in aggregate demand, leading to an upward sloping AS in the short run.

C) high competition

This choice is incorrect as high competition generally leads to firms operating at or near their productive capacity, which does not inherently explain the upward slope of the short-run AS. Competition affects pricing and output decisions but does not directly relate to wage stickiness.

D) AD downward

This option is incorrect because a downward sloping aggregate demand (AD) curve does not explain why the short-run AS is upward sloping. The relationship between AS and AD in the short run is instead influenced by the rigidity of wages and prices, not the direction of the AD curve.

Conclusion

The upward slope of the short-run aggregate supply curve is fundamentally linked to the stickiness of wages, which prevents immediate adjustments to economic changes. This contrasts with the other options, which either misinterpret the economic dynamics at play or do not address the wage rigidity factor that is critical to understanding short-run AS behavior.