Consider an economy with the following specifics: The wage setting curve is given by W P/e...

 

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Consider an economy with the following specifics: The wage setting curve is given by W P/e = z - Bu where the constant z denotes any variable whose increase would increase the real wage u is the unemployment rate. The production function is Y = AN (where N is employed labor and A is labor productivity), and firms price at a mark-up of m over marginal costs. a) Write down the price setting equation. b) Does the equilibrium real wage increase or decrease (relative to the case where A = 1)? Provide some intuition for your answer. c) Does the natural rate of unemployment increase or decrease (relative to the case where A=1)? Provide some intuition for your answer. d) Based on your understanding of the labor market model presented by Blanchard (i.e., the WS and PS relations), explain what types of policies could be implemented to cause a reduction in the natural rate of unemployment. Consider an economy with the following specifics: The wage setting curve is given by W P/e = z - Bu where the constant z denotes any variable whose increase would increase the real wage u is the unemployment rate. The production function is Y = AN (where N is employed labor and A is labor productivity), and firms price at a mark-up of m over marginal costs. a) Write down the price setting equation. b) Does the equilibrium real wage increase or decrease (relative to the case where A = 1)? Provide some intuition for your answer. c) Does the natural rate of unemployment increase or decrease (relative to the case where A=1)? Provide some intuition for your answer. d) Based on your understanding of the labor market model presented by Blanchard (i.e., the WS and PS relations), explain what types of policies could be implemented to cause a reduction in the natural rate of unemployment.

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a Write down the price setting equation ANS WER P m Y A W Bu where P price m marginal cost Y output A productivity W wage u unemployment rate B labor ... View the full answer