Consider the ASAD model of a closed economy with zero ongoing inflation in the medium run. The aggregate demand curve is determined by the IS-LM model. The aggregate supply curve is derived from the imperfect competition model of the labour market (the WS-PS model where firms have perfect foresight, monopoly power, and use a linear technology with constant returns to labour; workers expect zero inflation in every period, and their wage requests are an increasing function of wage-push factors like unions' bargaining power). The economy is initially in the potential equilibrium. Assume a permanent increase in the bargaining power of unions. Fiscal and monetary authorities perfectly forecast this shock and decide to neutralize immediately its consequences for the price level by enacting a “policy of price stability” that successfully eliminates all fluctuations in the general price level in every period. Therefore, the economy is subject to two simultaneous shocks – the increase in workers bargaining power and the price stabilization policy – that leave the price level unchanged in every period. . a) Assuming that interventions are successful, what happens real wage in the short and in the medium run?
Consider the ASAD model of a closed economy with zero ongoing inflation in the medium run. The aggregate demand curve is determined by the IS-LM model. The
. a) Assuming that interventions are successful, what happens real wage in the short and in the medium run?
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