Final answer:
In the overlapping wage contract model, the level of persistence in output is influenced by how forward or backward-looking the agents are. If agents are relatively forward-looking, there will be high persistence in output. Conversely, if agents are relatively backward-looking, there will be low persistence in output.
Step-by-step explanation:
In the overlapping wage contract model, the level of persistence in output is influenced by how forward or backward-looking the agents are. If agents are relatively forward-looking, there will be high persistence in output. This means that the current level of output will have a strong influence on future levels of output. On the other hand, if agents are relatively backward-looking, there will be low persistence in output. In this case, the current level of output will have less impact on future levels of output.
For example, if agents are forward-looking, they are more likely to base their wage demands and employment decisions on their expectations of future economic conditions. This can lead to a situation where changes in output today have a lasting impact on future levels of output. Conversely, if agents are backward-looking, they are more likely to base their decisions on past economic conditions, making output less persistent.