Question

Suppose that the wage-setting equation, evaluated at medium run equilibrium, is ?/? = A(z – u), where z denotes workers' reservation wage.

(i) Calculate the natural rate of unemployment as a function of z, the markup m, and the stock of technology A.

(ii) Show the effect of an increase in A on the natural rate of unemployment and the real wage.

Answer #1

A) At natural rate of unemployment P= P^e, where P^e is the expected price.

We also have **
,** where m is the markup price.

From above two equations we will get natural unemployment rate,

B) We can show that increase in A on as

This shows that natural unemployment rate will increase as A goes up.

From equation 1 we get that

Which says, if

and

The wage setting equation is W = P(1 − u) (this means that the
workers’ reservation wage z is normalized to 1), and the markup is
20%. (i) Calculate the natural rate of unemployment un. (ii)
Calculate the natural rate of unemployment corresponding to a 5%
increase in the markup (that is, m = 25%). (iii) Calculate the
natural rate of unemployment corresponding to a 5% reduction in the
reservation wage (that is z = .95).

Suppose the mark-up is 12% and the wage-setting equation is W = P
(1 – u), where u is the unemployment rate.
i) What is the real wage, as determined by the price-setting
relationship?
ii) Define the natural rate of unemployment in this context and
calculate it for this example.
iii) Suppose the markup of prices over
costs decreases to 6%. Compute the natural rate of unemployment now
and compare it to the one in ii)? If...

Suppose that the markup of goods is 5%, and that the
wage-setting equation is:
W = P(1 − u)
(a) What is the real wage, as determined by the price setting
equation?
(b) What is the natural rate of unemployment?
(c) Suppose that the markup of prices over marginal cost
increases to 10%. What happens to the natural rate of unemployment?
Explain the logic behind your answer.

Suppose the economy is characterised by the following equations:
Price setting: P = (1+m) (W/A) Wage setting: W = Ae P e (1-u) where
A is the unobserved and difficult to estimate technology parameter
in the production function Y=AN, and Ae is its expected value.
First suppose that expectations of both prices and technology are
accurate.
Solve for the natural rate of unemployment and medium-run real
wage rate if the mark-up, m, is equal to 10 per cent and A...

1. Suppose the United
States economy is represented by the following
equations:
Z = C + I + G
C
= 100 +
.5YD T
=
200 I
= 30
YD= Y -
T G
= 100
a) Which variables
are endogenous and which are exogenous?
b) Calculate
equilibrium levels of output, consumption and disposable
income
c) What is the
multiplier for this economy
d) What is the
effect of increasing G by $100 on Y and the deficit
2) Suppose that the wage
and price setting relations are...

1. Suppose the United
States economy is represented by the following
equations:
Z = C + I + G
C
= 100 +
.5YD T
=
200 I
= 30
YD= Y -
T G
= 100
a) Which variables
are endogenous and which are exogenous?
b) Calculate
equilibrium levels of output, consumption and disposable
income
c) What is the
multiplier for this economy
d) What is the
effect of increasing G by $100 on Y and the deficit
2) Suppose that the wage
and price setting relations are...

1. Explain the impact of the following shocks on real wage and
the equilibrium unemployment rate in the medium run. Illustrate
your answers using the WS/PS diagram:
a. An increase in the price of oil
b. An increase in unemployment benefits
c. An decrease in policy interest rate.

Consider a hypothetical economy that is at a short run and long
run equilibrium. Suppose that in this economy, there is an adverse
(i.e. negative) supply shock. Additionally, there is an increase in
people’s expectations about future inflation. Considering the
Phillips Curve, answer what will happen to:
i) The inflation rate.
ii) The unemployment rate.
In the short-run for such an economy.
Inflation will increase; unemployment will increase.
Inflation will decrease; unemployment will decrease.
Inflation will increase; unemployment will decrease....

Explain and discuss whether each of the following statements is
true or false (please explain)
The aggregate supply function is upward sloping because at
higher expected price levels, firms wish to produce more
output.
In the medium run output and the price level always return to
their same (original) values after a demand shock.
An increase in the minimum wage will cause an increase in the
natural rate of unemployment with an increase in the equilibrium
real wage.

13. Suppose there is an increase in government spending in a
closed economy. In medium-run such a fiscal policy will cause:
none of the other answers is correct.
ambiguous effects on the neutral real interest rate
the nominal wage to rise
no change in the neutral real interest rate
the neutral real interest rate to rise
14. Suppose the economy is initially in the steady state.
According to Solow model without technological progress, an
increase in the depreciation rate (δ)...

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