Question

Suppose that a decline in unionization reduces the amount of wage contracts that are being signed and also brings about a reduction in the length of the typical wage contract that is signed. What would the impact on the IA line for that economy be? Explain.

Answer 1

IA line denotes the inflation adjustment line of the economy . When there is decline in uninization , wages fall in the economy , equilibrium wage come down . So this would lead to decrease in aggregate expenditure in the economy or fall of aggregate demand . The demand curve would therefore shift to the left and real GDP would be falling below potential. The inflation adjustment line would then shift downward (reflecting a decrease in the inflation rate) causing a movement along the new demand curve until real GDP was equal to potential .