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Let's summarize the chain of events that leads from an increase in the price level to an  increase in output in the imperfect-information model. When the overall price level rises,  producers mistake it for a relative increase in the price level. When the relative price  level rises, the real wage earned by producers rises. When the real wage earned by  producers rises, the amount of labor supplied by producers increases. When the  amount of labor supplied by producers increases, output increases.  Sticky-Price Model  The sticky-price model of the upward sloping short-run aggregate supply curve is based  on the idea that firms do not adjust their price instantly to changes in the economy.  There are numerous reasons for this. First, many prices, like wages, are set in relatively  long-term contracts. Imagine if your wage at McDonalds changed every day as the 
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This note was uploaded on 12/13/2011 for the course ECO 1320 taught by Professor Staff during the Fall '11 term at Texas State.

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