Answer to Question #97457 in Macroeconomics for Anju Rani

Question

Use the model of aggregate demand and short run aggregate supply to explain how each of the following would affect the real GDP and price level in short run.
1. reduction in nominal wages
2.a major improvement in technology
3.a reduction in net exports

Answer 1

The relative tightness of prices in the short term is related to: the duration of contracts that oblige to sell and buy at fixed prices (the major part of such contracts are labor agreements, which are concluded for a period of one to three years); with the amount of raw material and material inventories from manufacturers; state regulation of minimum wages and pricing policy of the government; with the inertia of the pricing policy of large companies.