Assume That an Economy Operates According to the Sticky-Wage Model

Essay

Assume that an economy operates according to the sticky-wage model.The nominal wage was set to make labour supply and labour demand equal when the expected price level equaled 120 (as measured by the consumer price index).a.Use a graph of the labour market to illustrate what happens to the quantity of labour employed if the actual price level over the time period when wages are stuck equals 110.b.Use a graph of the production function to illustrate how the quantity of output produced changes if the actual price level equals 110 when the expected price level is 120.c.Given the unexpectedly low price level,will this economy be operating above,below,or at the natural rate?