1.Assume the economy starts at the natural level of output. Using AS-AD analysis, compare the adjustment in the economy to an increase in government spending under fixed exchange rates with

a)downwardly rigid wages and prices. (10 marks)

b)competitively determined wages and prices.

This is the exact question as received in my practice questions. Here is an example of a similar question that has been answered.

1.Assume the economy starts at the natural level of output. Using AS-AD analysis, compare the adjustment in the economy to an increase in immigrant labor due to war in Syria under flexible exchange rates with

a)downwardly rigid wages and prices. (10 marks)

An increase in immigration affects the labour supply, it increases the pool of workers in certain sectors of the economy. The labour supply curve will shift rightwards, causing a fall in wages and an increase in the quantity of labour available. However, as prices and wages are downwardly rigid then, the prices and wages would be settled at their original levels.The graph above shows how there is a shift in AS, because there are more workers in the economy. After the short run and because of the downwardly rigid wages and prices, the AS supply would be back at the original level.

b)competitively determined wages and prices. (10 marks)

An increase in immigration affects the labour supply, it increases the pool of workers in certain sectors of the economy. The labour supply curve will shift rightwards, causing a fall in wages and an increase in the quantity of labour available. In addition, there will be a rise in quantity and a fall in the prices as the output level increases. In a competitively determined wages and prices an increase in immigration would make prices and wages move to a lower level. The price level will decrease from P1 to P2 and the output to increase from Y1 to Y2.