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3. An economy is characterized by the following price- and wage-setting equations: P = (1+m)(W/A) W...

3. An economy is characterized by the following price- and wage-setting equations:

P = (1+m)(W/A)

W = PeAe(1-u)a. Find the rate of unemployment if Pe=P but Ae does not necessarily equal

A. Explain the effects of Ae/A on the unemployment rate.

b. Now suppose that Pe=P and Ae=A. Solve for the natural rate of unemployment if the markup is equal to 0.05

.c. Does the natural rate of unemployment depend on productivity? Explain.

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