Y5

In our description of the labor market, we have assumed that workers and companies negotiated at the beginning of each period the nominal wage for the period. We will now assume that real contracts are possible, that is, the workers and companies negotiate the real wage at the beginning of each period. A Another way to interpret this is that the contracts are perfectly indexed. So the salary real is known at the beginning of the period. 1. In class, we derived the wage determination curve, WS, as: / =^/(, ) How is this equation modified by the presence of real contracts? 2. The pricing curve, PS, is unaffected. This is therefore given by: = (1 + ) Using these two curves, the definition of the unemployment rate and the function of production Y=N, give the equation of the aggregate supply curve (which is a relation between P and Y). Draw his graph. 3. Suppose the economy is in medium-term equilibrium and the bank central office decides to increase the stock of money. Find the effect of this change in policy on GDP and the level of prices in the short and medium term. 4. Suppose the economy is in medium-term equilibrium and the government decides to lower taxes. Find the effect of this policy change on GDP and price level in the short and medium term.