Review the Sticky-Wage Theory of the Short-Run Aggregate-Supply Curve

question 56

Essay

Review the sticky-wage theory of the short-run aggregate-supply curve.
a) Use the sticky-wage theory to explain why the short-run aggregate-supply curve is upward sloping.
b) Based on the same theory, construct an argument to explain why the aggregate-demand curve is downward sloping. Though simple and appealing, why may this theory not completely explain the short-run aggregate-demand curve?

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Definitions:

Availability Heuristic

The availability heuristic is a cognitive bias that involves making judgments about the likelihood of events based on how easily examples come to mind.

Functional Fixedness

A tendency to think of things based on their usual functions, which may make it harder to solve a problem.

Framing

The way information is presented or worded, which can significantly affect decisions and judgments.

Insight

The capacity to gain an accurate and deep understanding of someone or something, often suddenly and intuitively.