1.(9marks)

Suppose Chino is a closed economy. A large portion of the work force has joint a strong labor union. As such, the nominal wages of most workers are downward- rigid.

Suppose most households lose their wealth in a recent clash of the stock market. How would the price and output level of Chino be affected in the short run?

Explain by using the AD-AS model. Particularly, use the sticky-wage model of aggregate supply to explain the magnitude of the effects on price and output.