terrichichester-BU204-homework-unit9

terrichichester-BU204-homework-unit9 - HOMEWORK - UNIT 9...

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HOMEWORK - UNIT 9 DISINFLATION, AND DEFLATION Chapter 15: Problems 4 and 10 on page 391 Chapter 16: Problems 5 and 6 on page 413 Chapter 15 / LABOR MARKETS, UNEMPLOYMENT, AND INFLATION /26 4. In Northlandia, there are no labor contracts; that is, wage rates can be renegotiated at any time. But in Southlandia, wage rates are set at the beginning of each odd year and last for two years. Why would equal-sized falls in aggregate output due to a fall in aggregate demand have different effects on the magnitude and duration of unemployment in these two economies? In Northlandia there is a competitive market for the workers so that when there is a fall in aggregate demand, the businesses will be able to lower the wage rates to reflect the lower revenues that they are getting from a lower aggregate demand. In Southlandia, since wages cannot be changed until the next odd year, the companies will be paying its employees more than it can afford to if aggregate demand is down. As a result the companies will have to be forced to fire or layoff some of its employees so that the companies can afford to stay in business during the times when aggregate demand is down. Therefore there will be different effects on the magnitude and duration of unemployment, since
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terrichichester-BU204-homework-unit9 - HOMEWORK - UNIT 9...

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