Is the following true, false or uncertain? Assume that workers supply effort based on their expected real consumption wage and consume a basket with a non-negligible component of imported goods and services. The government in an open economy implements a contractionary fiscal policy (from an initial medium-run equilibrium) motivated, for example, by its desire to reduce national debt. This leads to lower real wages and higher unemployment in equilibrium. Hint: you may want to compare this with the case in which the initial two assumptions do not hold. Use graphs if possible.

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