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Consider a closed economy hat begin with her long run equilibrium.


Suppose recently, political

instability is mounting. Most households feel pessimistic and hence cut back their spending. Assume the policymakers do not accommodate the shock.


Adopt the sticky-wage model of the short run aggregate supply to explain the short run effects of this shock. Further, explain the gradual long run adjustments using the sticky-wage model of the short run aggregate supply.

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