Suppose the mark-up of goods prices over marginal cost is 8% and that the wage-setting equation is W = P(1 – 2u), where u is the unemployment rate.
(a) Based on the medium-run analysis of the labor market model in Chapter 7, what the natural rate of unemployment? Illustrate the equilibrium with a diagrammatical sketch showing the price-setting and wage-setting curves.
(b) Suppose the mark-up increases to m=10%? How will this affect the medium-run equilibrium? Indicate the new equilibrium in your diagrammatic sketch.

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15-12-2022
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Suppose the mark-up of goods prices over marginal cost is 8% and that the wage-setting equation is W = P(1 – 2u), where u is the unemployment rate.
(a) Based on the medium-run analysis of the labor market model in Chapter 7, what the natural rate of unemployment? Illustrate the equilibrium with a diagrammatical sketch showing the price-setting and wage-setting curves.
(b) Suppose the mark-up increases to m=10%? How will this affect the medium-run equilibrium? Indicate the new equilibrium in your diagrammatic sketch.

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tutorconsortium116 tutorconsortium116 · Answer 1 · 2022-12-23T06:18:34+01:00

The rate of unemployment that is compatible with a constant inflation rate is simply defined as the natural rate of unemployment.

Explain about the natural rate of unemployment?

The rate of unemployment that is consistent with a constant inflation rate is referred to as the "natural rate of unemployment." The rate of unemployment that would exist if cyclical swings didn't exist is consequently the natural rate.

Economic theory that holds that, over the long run, the market will decide a typical rate of employment, which the government can only raise by inducing a high rate of inflation.

The supply side of the economy, which includes production potential and economic institutions, largely determines the natural unemployment rate. Involuntary unemployment may be a part of the natural rate of unemployment if these institutional traits include persistent labor market mismatches or real pay rigidities.

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