1) Consider the medium run. You should assume there is no liquidity trap. Start from a medium run equilibrium. Assume that the central bank will pursue policies to keep the economy at full employment (at the natural unemployment rate). What would be the short-run and medium-run impact of an increase in unemployment benefits (increase in z) on the nominal wage and the real wage?
A) The nominal wage would increase in both the short run and the medium run; the real wage would be unchanged in both the short run and the medium run.
B) The nominal wage would increase in both the short run and the medium run; the real wage would increase in both the short run and the medium run.
C) The nominal wage would increase in the short run, but would return to the initial level in the medium run; the real wage would increase in the short run, but would return to the initial level in the medium run.
D) The nominal wage would increase in the short run, but would return to the initial level in the medium run; the real wage would be unchanged in both the short run and the medium run.
2) What would be the short-run and medium-run impact of an increase in government spending (increase in G) on the nominal wage and the real wage? (given the same above criteria).
A) The nominal wage would increase in both the short run and the medium run; the real wage would be unchanged in both the short run and the medium run.
B) The nominal wage would increase in both the short run and the medium run; the real wage would increase in both the short run and the medium run.
C) The nominal wage would increase in the short run, but would return to the initial level in the medium run; the real wage would increase in the short run, but would return to the initial level in the medium run.
D) The nominal wage would increase in the short run, but would return to the initial level in the medium run; the real wage would be unchanged in both the short run and the medium run.