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Effect on the real wage and employment in the short run

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Question: A decline in the labor income tax rate: Suppose there is a temporary decline in the tax rate that households pay on their labor income. Analyze the effect of this shock in the labor market diagram of a standard DSGE model (with no sticky prices or wages).

(a) What happens to the labor demand schedule?

(b) What happens to the labor supply schedule?

(c) What is the effect on the real wage and employment in the short run?

Reference no: EM131634632

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