The period from 2007 to 2009 was a time of economic contraction that some have called the "Great Recession." An even sharper (though shorter) economic contraction occurred during the COVID pandemic in 2020. During periods of recession, most firms experience a decline in demand for their products. If wages are flexible, economic theory predicts that the wages of workers should decline in recessionary periods. a. Did nominal wages decline during the 2007-2009 recession or during the 2020 COVID recession? b. Based on the discussion in the chapter, explain why this might be so. c. What are the implications of downward nominal wage rigidity for unemployment? Does downward nominal wage rigidity increase or reduce the level of unemployment compared to the level of unemployment that would emerge with flexible wages?

The period from 2007 to 2009 was a time of economic contraction that some have called the "Great Recession." An even sharper (though shorter) economic contraction occurred during the COVID pandemic in 2020. During periods of recession, most firms experience a decline in demand for their products. If wages are flexible, economic theory predicts that the wages of workers should decline in recessionary periods. a. Did nominal wages decline during the 2007-2009 recession or during the 2020 COVID recession? b. Based on the discussion in the chapter, explain why this might be so. c. What are the implications of downward nominal wage rigidity for unemployment? Does downward nominal wage rigidity increase or reduce the level of unemployment compared to the level of unemployment that would emerge with flexible wages?

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter18: Introduction To Macroeconomics: Unemployment, Inflation, And Economic Fluctuations

Section: Chapter Questions

Problem 13P

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Similar questions

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Assume that a 1% change in the inflation rate causes a 1% increase in nominal interest rates, which in turn causes a 1% drop in real growth the following year. During the latter half of the 1990s, real growth averaged about 4%. Calculate how much inflation would have to increase for the following to happen, using Okun’s Law. (A) A 1% increase in the unemployment rate. (B) A big enough change to cause a ‘‘typical’’ recession, where real GDP declines 2%. (C) Suppose real growth slows down to 2½% because of a change in consumer and business sentiment. How much would the unemployment rate change each year?
The college graduates of 2000 could hardly have asked for better luck. The unemployment ratedropped to 4.1 % in May 2000- roughly, the lowest level in a generation- and employers wereliterally scrambling for new hires. Starting salaries rose, many graduating seniors had numerousjob offers, and some firms even offered $10,000- $20,000 bonuses to students who signed thedotted line. Three years later, the job market for the Class of 2003 was rather different. U.S. economic growth had slowed to a crawl, and then to a halt. Companies that had stocked up on recent college grads in the tighter labour markets of 1998-2000 found themselves with more than they knew what to do with in 2002 and 2003. They were not eager to hire more. Bonuses and other “perks” disappeared; job offers became scarcer. With the unemployment rate around 6% in May and June of 2003, the job market was far from the worst ever. But it was nothing like the glory days of 2000. Discussion:(i) Briefly explain and justify…