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April 17 , 2011

Expansionary Monetary Policy and Aggregate Output Curves


In country A, all wage contracts are indexed to inflation.  That is, each month wages are adjusted to reflect increases in the cost of living as reflected in changes in the price level. 
In country B, there are no cost of living adjustments to wages, but the work force is completely unionized and the unions negotiate 3 year contracts.
In which country is an expansionary monetary policy likely to have a larger affect on aggregate output?  Explain answer with aggregate supply and aggregate demand curves.

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