Question

Consider a simple economy with search unemployment. The matching function is given by M = eQ^(1/2)A^(1/2)...

Consider a simple economy with search unemployment. The matching function is given by

M = eQ^(1/2)A^(1/2)

There were initially Q = 1000 unemployed workers looking for a job. Let b = 0.5, z = 1, k = 0.1, e = 3/5 and a = 0.5, where k is the cost of creating a vacancy.

  1. Provide the expression for the Beveridge curve.
  2. Calculate and interpret the slope of the Beveridge curve for the current state of the economy.
  3. How does a decrease in the matching efficiency e shift the beveridge curve?
  4. Assume the government wants to implement a policy that will decrease the unemployment rate by 25%.Compute the percentage change in b that will help reach this target.
  5. Assume instead that the government wants to implement a policy that will increase the vacancy rate by 25%. Compute the percentage change in b that will yield this new target.
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