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Explain the two effects that drive changes in nominal wages

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Reference no: EM132482861

1. How long does it take (roughly) for monetary policy to have an effect on real GDP?

2. Recall that wage and price growth are driven by multiple effects.

a. List and briefly explain the two effects that drive changes in nominal wages.

b. How do changes in wages end up affecting the price level?

3. Suppose a country is about to enter phase 3 (recovery) of disinflation: inflation has stopped, but with a recessionary output gap. The central bank is weighing its two options.

a. What are these options, and what is the main risk associated with each one?

b. Suppose that the country has a potential GDP of $50B, but the process of disinflation will result in a cumulative loss of $3.75B. However, inflation is reduced from 7% to 2% as a result. What is the sacrifice ratio?

Reference no: EM132482861

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