Suppose that the mark-up of goods prices over marginal cost is (5 %), and that the wage-setting

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Suppose that the mark-up of goods prices over marginal cost is \(5 \%\), and that the wage-setting equation is:
\[W=P(1-u)\]
where \(u\) is the unemployment rate.

a. What is the real wage, as determined by the price-setting equation?

b. What is the natural rate of unemployment?

c. Suppose that the mark-up of prices over costs increases to \(10 \%\). What happens to the natural rate of unemployment? Explain the logic behind your answer.

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Macroeconomics A European Perspective

ISBN: 9781292360898

4th Edition

Authors: Olivier Blanchard, Alessia Amighini, Francesco Giavazzi

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