Question

In the Keynesian sticky wage model, nominal wages are assumed to be stuck _____ the equilibrium wage, thus resulting in _______

a) below; involuntary unemployment
b) at; no unemployment
c) above;involuntary unemployment
d) above; no unemployment

Answer 1

Nominal wages in the Keynesian sticky wage model are assumed to be stuck above the equilibrium wage, resulting in involuntary unemployment due to the excess supply of labor.

Step-by-step explanation:

In the Keynesian sticky wage model, it is assumed that nominal wages are stuck above the equilibrium wage. This wage rigidity leads to involuntary unemployment because the number of job seekers (Qs) exceeds the number of available job openings (Qd). When wages are above equilibrium, firms cannot or do not reduce wages to the market-clearing level, often due to contracts, minimum wage laws, or concerns about morale. As a result, there is an excess supply of labor, which translates into unemployment.

Therefore, the correct answer to the student's question is: c) above; involuntary unemployment. This situation is depicted in various figures which illustrate how sticky wages in the labor market prevent the adjustment to an equilibrium level where the number of job seekers would be equal to the number of vacancies, eliminating involuntary unemployment.