In economy A, all workers agree in advance on the nominal wages that their employers will pay them. In economy B, half of all workers have these nominal wage contracts, while the other half have indexed employment contracts, so their wages rise and fall automatically with the price level. According to the sticky-wage theory of aggregate supply, which economy has a more steeply sloped short-run aggregate supply curve? In which economy would a 5 percent increase in the money supply have a larger impact on output? In which economy would I have a larger impact on the price level? Explain.

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December 14, 2012

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