Question

Adapt the DMP model to include government activity as follows. Suppose that the government must incur a cost kto post a vacancy. Supposing that the government operates G firms, then the number of matches in the economy as a whole is M = em(Q, A + G), where A is the number of private firms that choose to post vacancies. Assume the government pays the same wages as do private sector firms. Determine the effects of G on the unemployment rate, the vacancy rate, the labour force, the number of private firms, the total number of firms, aggregate output and labour market tightness.

Answer 1

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