1. Assume that the economy of Laboria is at the medium run equilibrium. The government approves aset of structural reforms oriented towards labor market liberalization, decreasing unemploymentprotection and costs of firing. Answer the following question, properly motivating your responses.a. Which model (or models) may be used to investigate the consequences of this economicshock, and which parameter would you chose to incorporate it in the model?b. Suppose the AS-AD model applies. Describe the short run effects on nominal and real wage,interest rate, and consumption. Show how the equilibrium shifts after the shock in a graph.c. Suppose the AS-AD model applies. Describe the economic mechanism that pushes theeconomy from the short to the medium run equilibrium. Show it in a graph (you can use thesame graph of the previous point). |d. Summarize the effect of the labor market liberalization and discuss possible shortcomings ofthe model that might affect results.

a) AS-AD model can be used to examine the consequences of the policy. Parameters would be 'price…

Answered: (o ch anc AS- th

Business

Economics

(o ch anc AS- th

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

1. Assume that the economy of Laboria is at the medium run equilibrium. The government approves a
set of structural reforms oriented towards labor market liberalization, decreasing unemployment
protection and costs of firing. Answer the following question, properly motivating your responses.
a. Which model (or models) may be used to investigate the consequences of this economic
shock, and which parameter would you chose to incorporate it in the model?
b. Suppose the AS-AD model applies. Describe the short run effects on nominal and real wage,
interest rate, and consumption. Show how the equilibrium shifts after the shock in a graph.
c. Suppose the AS-AD model applies. Describe the economic mechanism that pushes the
economy from the short to the medium run equilibrium. Show it in a graph (you can use the
same graph of the previous point). |
d. Summarize the effect of the labor market liberalization and discuss possible shortcomings of
the model that might affect results.

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