Question

Which of the following models explain(s) the upward-sloping aggregate supply curve in the short-run?

• A. Sticky-wage model
• B. Worker-misperception model
• C. Imperfect-information model
• D. Solow model

Hint:

Short-run upward-sloping AS curve is explained by nominal rigidities and imperfect information, while long-run growth models like Solow are irrelevant here.

Answer 1

The Correct Option is A, B, C

Step 1: Sticky-wage model (A).
This model assumes nominal wages are slow to adjust. If prices rise unexpectedly, real wages fall, encouraging firms to hire more workers, which raises output. Hence, (A) is correct.
Step 2: Worker-misperception model (B).
Workers may misinterpret nominal wage changes as real wage changes. If prices rise but workers think wages increased in real terms, they supply more labor, raising output. Hence, (B) is correct.
Step 3: Imperfect-information model (C).
Firms may confuse general price increases with relative price increases of their own goods, causing them to produce more. Hence, (C) is correct.
Step 4: Solow model (D).
The Solow model is a long-run growth model and does not explain short-run aggregate supply. Hence, (D) is incorrect.
Therefore, the correct answers are (A), (B), and (C).