solution

Suppose the wage setting curve is given by: W = P(1 – u + z), with z= 1%. and the price setting curve is given by: P= (1 + m)W (a) Suppose m = 5% and z = 1%. What are the equilibrium values of the real wage (w/p) and the natural rate of unemployment (Un)? Comparative statics: (b) Suppose the mark-up increases to 10%, but z remains the same. What are the new equilibrium values of the real wage (w/p) and the natural rate of unemployment (Un)? (c) Suppose the mark-up is once again 5%, but z = 2%, what are the new equilibrium values of the real wage (w/p) and the natural rate of unemployment (un)?