Keynesian believe in rigid prices. It is mainly due to two reason that create the upward sloping aggregate supply (AS) function.

1. Rigid Wages: Economists believe that wages tend to be fixed by contracts or other agreements. When prices rise, but higher wages do not accompany them , producers' profits will rise temporarily, and the firm will produce more.

2. Sticky Prices: Prices are costly to change in some industries (menu costs). Where this is true, decreases in the general price level will negatively affect sales, profits, and output, causing producers to produce less.

These two reasons given for the upward sloping AS are likely to be true only for short periods of time, and thus the AS curve is often called short run AS (SRAS) curve.

Do you notice rigidity in wage rate? When inflation rate is over 2%, is your wage rate increased by 2%? Thanks.