Final answer:
Option c is consistent with the sticky-wage explanation of the SRAS curve; it describes a situation where the price level falls, real wages increase due to sticky nominal wages, and the quantity demanded of labor falls, leading to reductions in employment.
Step-by-step explanation:
The sticky-wage explanation for the upward-sloping Short-Run Aggregate Supply (SRAS) curve suggests that because nominal wages do not adjust quickly to changes in the price level, there can be a time lag before wages catch up to inflation. To identify the choice that is consistent with the sticky-wage explanation, we review each answer choice in the context of a rising price level. According to the sticky-wage theory, if the price level rises and nominal wages remain constant temporarily, the real wage (the wage adjusted for inflation) will fall. This decline in the real wage makes employing workers relatively cheaper, which, according to the sticky-wage theory, would increase the quantity of labor demanded by firms. Hence, firms will employ more workers at a lower real wage until nominal wages adjust to the new price level.
Reviewing the choices, only option c is consistent with the sticky-wage explanation: 'The price level falls, the real wage rises, and the quantity demanded of labor falls.' When the price level falls but wages are sticky and do not decrease immediately, it means the real wage increases. As the cost of employment rises, employers demand less labor, leading to lower employment levels. This creates an upward-sloping SRAS curve because it suggests that as the price level increases, it is less costly for firms to produce additional output, leading to an increase in production, which is represented by a movement up along the SRAS curve.