1. The period from 2007 to 2009 was a time of economic contraction that some have called the “Great Recession.”

An even sharper (though shorter) economic contraction occurred during the COVID pandemic in 2020. During periods of recession, most firms experience a decline in demand for their products. If wages are flexible, economic theory predicts that the wages of workers should decline in recessionary periods.

a. Did nominal wages decline during the 2007–2009 recession or during the 2020 COVID recession?

b. Based on the discussion in the chapter, explain why this might be so.

c. What are the implications of downward nominal wage rigidity for unemployment? Does downward nominal wage rigidity increase or reduce the level of unemployment compared to the level of unemployment that would emerge with flexible wages?