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Suppose that the markup of goods is 5%, and that the wage-setting equation is: W =...

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.

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