Assume that an economy operates according to the sticky-wage model. The nominal wage was set to make labor supply and labor demand equal when the expected price level equaled 120 (as measured by the consumer price index). a. Use a graph of the labor market to illustrate what happens to the quantity of labor employed if the actual price level over the time period when wages are stuck equals 110. b. Use a graph of the production function to illustrate how the quantity of output produced changes if the actual price level equals 110 when the expected price level is 120. c. Given the unexpectedly low price level, will this economy be operating above, below, or at the natural rate?
Assume that an economy operates according to the sticky-wage model. The nominal wage
was set to make labor supply and labor demand equal when the expected
equaled 120 (as measured by the
a. Use a graph of the labor market to illustrate what happens to the quantity of
labor employed if the actual price level over the time period when wages are
stuck equals 110.
b. Use a graph of the production function to illustrate how the quantity of output
produced changes if the actual price level equals 110 when the expected price
level is 120.
c. Given the unexpectedly low price level, will this economy be operating above,
below, or at the natural rate?
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