Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text: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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