Consider that the labor market is characterized by the following two equations:

The wage setting equation W =PeF(u, z), where W = nominal wage; Pe = expected price; u = unemployment; z = other factors of wage determination. 

The price setting equation: !

W/P = 1/1+M

where P = price level; m = markup. 

Explain why the nominal wage is a function of the expected price. Draw the curves representing the two equations above, label the axes, and indicate the implied natural rate of unemployment. What happens to the wage rate and the actual price level when the expected price increases? Explain.