Question

If an economy has aggregate price levels that are increasing, but the wage rate stays the same because of downward wage stickiness, what would be the economic consequences

Answer 1

Business would fire some employees as labor becomes too expensive and the quantity of real GDP supplied would decrease.

Step-by-step explanation:

According to the sticky wage
`\text{theory}`, when the stickiness enters a market, there is a change in
`\text{one direction}` which will be favored over a change in the other direction.

The
`\text{aggregate price level}` is the measure of overall level of the prices in an economy.

When the
`\text{aggregate price level}` increases, it results in inflation. In an economy, when the aggregate price level increases, and the wage rate remains the same due to the downward wage stickiness, it results in an economy which would fire some of the employees as the labor becomes very expensive and the quantity of the real GDP supplied would also decrease.