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What happens to output

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Consider an economy in which unemployment is at its natural rate, and unions expect next year's inflation rate to be 5 percent, and they are able to obtain only 3 percent nominal wage increase for next year.

(i) What happens to output? Explain your answer.

(ii) What happens to real wages, employment and output if unions are able to obtain a 5 percent nominal wage increase?

Reference no: EM132512099

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