Each of the following events can be used to explain why the SRAS curve is upward

Question

Each of the following events can be used to explain why the SRAS curve is upward sloping. Which event is an example of a menu cost? Nominal wage confusion? Money illusion? Fill in the blanks and answer any related questions. a. Workers notice an increase in their nominal wage but are slow to notice that the price of things they consume have increased by the same percentage. They may infer that the reward to working is temporarily __________ (high/low) and so supply a _________ (smaller/larger) quantity of labor. b. Suppose that the cost of wood for the furniture a shop makes and sells over the Internet increased by 20 percent in the past month. Although the cost to raise prices on its furniture is minimal, it does not increase prices at the present time. Why not? How could this affect the number of employees at this shop and its workload? c. The price level is higher than expected so some firms believe that the relative price of what they produce has _________ (increased/decreased), so they __________ (increase/decrease) production. Please clearly label answers, thanks!

Explanation / Answer

Part a : High, larger

This is an example of nominal wage confusion.

Part b: This is an example of menu cost. when the cost of reprinting the menu cards with new price label exceeds the increase in profits from rise in the prices, the firms are reluctant to increase the prices of the goods. Rise in the cost of raw materials will lower profit and reduce the number of employees and workload will increase.

Part c: Increased, increase. This is an example of money illusion.

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