Consider the ASAD model of a closed economy with zero ongoing inflation in the medium run. The aggregate demand curve is determined by the IS-LM model. The aggregate supply curve is derived from the imperfect competition model of the labour market (the WS-PS model where firms have perfect foresight, monopoly power, and use a linear technology with constant returns to labour; workers expect zero inflation in every period, and their wage requests are an increasing function of wage-push factors like unions' bargaining power). The economy is initially in the potential equilibrium. Assume a permanent increase in the bargaining power of unions. Fiscal and monetary authorities perfectly forecast this shock and decide to neutralize immediately its consequences for the price level by enacting a “policy of price stability” that successfully eliminates all fluctuations in the general price level in every period. Therefore, the economy is subject to two simultaneous shocks – the increase in workers bargaining power and the price stabilization policy – that leave the price level unchanged in every period. a) Assuming that interventions are successful, what happens employment in the short and in the medium run?
Consider the ASAD model of a closed economy with zero ongoing inflation in the medium run. The aggregate
a) Assuming that interventions are successful, what happens employment in the short and in the medium run?
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