Suppose that in Wageland all workers sign annual wage contracts each year on January 1 .
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3)

Suppose that in Wageland all workers sign annual wage contracts each year on January 1.No matter what happens to prices of final goods and services during the year, all workers

earn the wage specified in their annual contract. This year, prices of final goods and services fall unexpectedly after the contracts are signed. Answer the following questions using a diagram and assume that the economy starts at potential output.
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4) In each of the following cases, in the short run, determine whether the events cause ashift of a curve or a movement along a curve. Determine which curve is involved andthe direction of the change.a.As the value of the dollar increases in terms of other currencies and American producers pay less in dollar terms for foreign steel, producers’ profit per unit increases and they are willing to supply a greater quantity of aggregate output at any given aggregate price level. The short- run aggregate supply curve will shift to the right.b.As the Federal Reserve increases the quantity of money, households and firms have more money, which they are willing to lend out, and interest rates fall. The lower interest rates will increase investment spending and consumer spending, leading to a greater quantity of aggregate output demanded at any given aggregateprice level. The aggregate demand curve will shift to the right.c.If unions are able to negotiate higher nominal wages for a large portion of the workforce, this will increase production costs and reduce profit per unit at any given aggregate price level. The short- run aggregate supply curve will shift to theleft.d.As the aggregate price level falls and the purchasing power of households’ and firms’ money holdings increases, the public tries to reduce its money holdings by borrowing less and lending more. So interest rates fall, leading to a rise in both investment spending and consumer spending. This is the interest rate effect of a change in the aggregate price level, represented as a movement down along the aggregate demand curve.
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