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Consider Two Economies: One Operates According to the Sticky-Wage Model

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Essay

Consider two economies: one operates according to the sticky-wage model and one operates under the sticky-price model.Aggregate demand unexpectedly falls in both countries,leading to a recession and an unexpected decline in price level and the demand for output.a.Use a graph of the labour market in each country to illustrate the impact of the recession on the level of employment and the real wage.b.In which country is the real wage procyclical? In which country is the real wage counter-cyclical?


Definitions:

Simple Interest

Interest determined just on the base amount, not including compounded interest.

Maturity

The point in time when the principal amount of a loan, bond, or other financial instrument becomes due and is to be paid or settled.

Contract

A legally binding agreement between two or more parties that is enforceable by law.

Annually

Pertaining to something that occurs once every year or relating to a period of one year.

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