00:01
In this question, we want to consider what might happen in an economy where all wages are set in three -year contracts, and then the federal bank, in this case, the bank of canada, announces a disinflationary change in monetary policy.
00:13
So this would be contractionary.
00:15
So we want to slow the economy down.
00:17
And we're saying that it's going to begin immediately.
00:21
So we want to know if this disinflation would be costless and why or why not.
00:25
Okay, so here's what we know.
00:27
We know that all the wages are set in three -year contracts.
00:31
We want to enact disinflationary money policy.
00:35
So the three -year contracts means that we're going to have sticky prices.
00:38
So we can't adjust these wages to the new price level that we're going to be receiving from this disinflationary monetary policy.
00:47
Right.
00:47
And then, so this is going to be contractionary monetary policy.
00:53
Right.
00:53
So we're going to maybe have higher interest rates set by the fed.
00:56
They might engage in open market operations by selling bonds, all things to try and remove the flow of money from the economy and get people to save and invest to slow the economy down.
01:10
So when that happens, that's going to impact aggregate demand.
01:14
So if people are spending less, they're saving more.
01:17
Aggregate demand is going to decrease and shift to the left.
01:22
Okay, so here was our original equilibrium point.
01:25
This was our original price level.
01:27
So i'll call that p0...