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Homework answers / question archive /  In an open market economy, suppose government is planning to set a real wage floor permanently which is ten percent higher than the market-clearing real wage rate

 In an open market economy, suppose government is planning to set a real wage floor permanently which is ten percent higher than the market-clearing real wage rate

Economics

 In an open market economy, suppose government is planning to set a real wage floor permanently which is ten percent higher than the market-clearing real wage rate. Assume that employed people pay social security tax at rate Th on their labor incomes, revenues from which are distributed to unemployed as unemployment benefits. For simplicity, assume that unemployed people live hand to mouth (that is, they don't save) while employed save MPC fraction of their incomes. How does this wage floor affect price level, nominal exchange rate, real exchange rate, investment level, real rental rate and nominal wage rate in the long run and very-long run? The economy is a small open market economy where government spending and lump-sum taxes are equal to zero.

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