Let the aggregate production function simply be Y = N where Y = output, N = employment. Suppose the price-setting equation is P = ( 1 + m ) W where m is firms' markup over marginal cost (W) and the wage-setting equation is W = Pe ( 1 + (1 - 100 u ) + z ) where u is the unemployment rate, W is the nominal wage, P e is the expected price level and z represents other factors affecting wage bargains. NB: In the medium run equilibrium, P e = P.

c. What is the natural rate of unemployment un?

d. Using your answer in c., with the production function Y=N (or output = employment) and unemployment defined as u=1-N/L where L is the labour force with L=200, compute the natural level of employment, Nn, and the natural level of output, Yn.