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Explain what effect an increase in the unemployment rate will have on the real wage based on: (1) the WS relation; and (2) th

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If workers expect prices to rise, they will demand higher wages so that their real (inflation-adjusted) wages are constant.As inflation accelerates, workers may supply labor in the short term because of higher wages, leading to a decline in the unemployment rate

An increase in unemployment benefits leads to an increase in the natural rate of unemployment. An increase in markups (or a decrease of productivity) decreases the real wage and leads to an increase in the natural rate of unemployment.

1.The Wage-Setting Relation. The natural rate of unemployment is the unemployment rate such that the real wage chosen in wage setting is equal to the real wage implied by price setting. Wages, Prices, and the. Natural Rate of. Unemployment.

2. The PS relation illustrates the effect of changes in the unemployment rate on the real wage implied bythe price-setting behavior of firms. Firms set prices as a markup over their marginal cost of producinggoods. Given that the marginal cost is assumed to be independent of the level of employment (and,therefore, the unemployment rate), changes in u will have no effect on the price firms set and, therefore,on the real wage based on PS behavior.

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