Question 16

The aggregate amount of output supplied increases when there is an increase in the price level in the short run because wages are sticky in the short run.

Wages tend to be inflexible or "sticky" in the short run, meaning that they do not adjust immediately to changes in the price level. Consequently, when the price level rises, firms can increase their output without facing an immediate increase in wage costs, leading to a higher aggregate supply.

A) Interest rate is high in the short run.

This option is incorrect as the interest rate does not directly relate to the increase in output supplied in response to a higher price level. While interest rates can influence investment and consumption, they do not explain the immediate relationship between price levels and output supply in the context of sticky wages.

B) The aggregate supply curve is vertical in the short run.

This statement is false because the aggregate supply curve is typically upward sloping in the short run, not vertical. A vertical aggregate supply curve would suggest that output does not change with price levels, contradicting the premise that higher prices lead to increased output.

C) Wages are sticky in the short run.

This option is correct because sticky wages mean that they do not adjust quickly to changes in the economy. When the price level rises, firms can hire more labor at existing wage rates, thus increasing production and output in the short run.

D) Wages change fast in the short run.

This is incorrect as it contradicts the concept of sticky wages. If wages were to change quickly, firms would not be able to increase output without facing rising labor costs, which would hinder the ability to respond to higher price levels with increased supply.

Conclusion

The correct answer is C, as sticky wages allow firms to increase output in response to rising prices without immediate wage increases. Options A, B, and D fail to accurately represent the dynamics of short-run aggregate supply, particularly the critical role that wage rigidity plays in the relationship between price levels and output supply.