(a)The general theory of wage determination can be expressed using the following equation:

(a) The general theory of wage determination can be expressed using the following equation: where, Ill. (b) W is the aggregate nominal wage is the expected price level u is the unemployment rate z is the catch-all variable reflecting other factors that affect wages If there is an increase in the expected price level, what happens to wages? If wages are determned by the 'efficiency wage', then higher unemployment allows firms to pay less to keep workers. If there is an increase in unemployment, then what happens to nomnal wages? The 'catch-all' variable may Include, say, for example, unemployment protectiom Does this make it costly for employers to lay off workers? If the catch-all variable increases, what happens to nominal wages? Consider the following figure: Suppose the unemployment rate is very low. How does the low unemployment rate change the relative bargaining power of workers and firms? What do your answers imply about what happens to the wage as the unemployment rate gets very low? Given your answer to part (a), why is there unemployment in the economy? (What would happen to real wages If the unemployment rate were equal to zero?)