Consider the ASAD model of a closed economy with zero ongoing inflation and workers misperceptions. Firms are perfectly competitive, produce output with diminishing marginal returns to labour and have perfect foresight over the price level. Workers, instead, expect zero inflation in each period. At time zero, the economy is in the potential equilibrium. There is a negative shock on aggregate demand - for example, a permanent fall in desired autonomous consumption at time t = 1.

What are the effects of the shock on the equilibrium real wage in the short and in the medium run?