Figure 11.11. Fiscal policy with real wage rigidity in both countries wage rigidity well describes the European countries. Letting Europe denote the home country and the US the foreign country (and ignoring the rest of the world for the time being), the model describing this configuration is obtained from Table 11.4 by setting A = 1 and A* = 0. The analysis of the effects of fiscal and monetary policy can once again proceed by graphical means. Since Europe experiences real wage rigidity, it is fully described by GMER and ASR (given in (GMER) and (ASR), respectively).

The US economy, on the other hand, experiences nominal wage rigidity, and is described by LM*(AS7v) and GME7v (given in (LM*(ASO) and (GME7„), respectively).

The different schedules have been drawn in Figure 11.12. The initial equilibrium is at eo.

A European fiscal expansion (a rise in g) leads to an upward shift of both GMER