Question: In Chapter 7, we saw that one possible explanation for higher natural rates of unemployment in Western Europe than the United States was stronger unions.

In Chapter 7, we saw that one possible explanation for higher natural rates of unemployment in Western Europe than the United States was stronger unions. Strong unions may also increase the severity of business cycles by increasing wage stickiness. Draw a graph of the aggregate labor market in equilibrium. Then suppose that the demand for labor decreases due to an economic downturn but that nominal wages and prices are sticky in the short run. Show the effect on the amount of labor employed and on unemployment.

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