In the wage-setting/price-setting model, a stable equilibrium implies that the economy's real wage and unemployment rate are permanently fixed and will not change in response to external economic shocks or policy changes.
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Consider an economy in a stable equilibrium where the real wage and unemployment rate are determined by the intersection of a wage-setting (WS) curve and a price-setting (PS) curve. A new government policy is enacted that significantly increases the level of competition among firms in the product market. Assuming the factors influencing the wage-setting curve remain unchanged, what is the most likely outcome for the new stable equilibrium?
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