Suppose Russ is a closed economy. Most workers are manual labor, and most of them receive minimum wages.

Due to the recent political instability, business firms in Russ become pessimistic about the future. Using the sticky-wage model of aggregate supply, explain the short run effects on price and output level of Russ. In particular, argue on the magnitude of the effects on price and output level.

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Step1 The stickywage model predicts that prices would increase and output will decrease in the near ... View the full answer