Consider two economies A and B. In economy A half its workers make annual wage agreements in January, and the other half makes annual wage agreements in June.

Consider two economies A and B. In economy A half its workers make annual wage agreements in January, and the other half makes annual wage agreements in June. In economy B all annual wage agreements are signed in January. In all other aspects the two economies are the same. Suppose that in July a new lower inflation target p1<p0 is unexpectedly announced by the Central bank in each economy. Compare the adjustment in these economies (illustrate by AD-AS graph)

Expert Solution

In country where agreements are made in January aggregate demand will shift rightwards by larger amount as shown in fig 1.in other country AD will shift by less amount towards right as employers will agree for less wage given less inflation. This is shown in fig 2.The amount of shift in Ist case is twice of the shift in 2nd

Rahul Sunny answered 2 years ago

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Consider two economies A and B. In economy A half its workers make annual wage agreements in January, and the other half makes annual wage agreements in June.

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