The natural rate of unemployment
Suppose that the markup of the prices of products over wage
cost, z, is 10%, and that the wage-setting equation is
W = P*(1 - 2m + z)
where m is the unemployment rate and z is the unemployment
benefit/minimum wage.
a. What is the real wage, as determined by the price-setting
equation?
b. Solve for the natural rate of unemployment
c. What happens to the natural rate of unemployment if z
falls from 10% to 5%? Explain your answer.
A. Real wage under price setting equation:
W/P=1/(1+z)= 1/(1+0.1)= 0.90
B. Natural rate of unemployment:
W/P=1-2m+z= 0.9
1-2m+0.1=0.9
1-0.8=2m
m=0.1
Natural rate of unemployment=0.1 or 10%
C. If z=0.05
1-2m+0.05=0.9
1-0.05-0.9=2m
0.05/2=m
0.025=m
Natural rate of unemployment =0.025 or 2.5%
When markup falls, natural rate of unemployment falls.
The natural rate of unemployment Suppose that the markup of the prices of products over wage...
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Please help with C and D. Thank
You.
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