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6 Energy Prices in an ASAD Model Consider the following ASAD model where Y is real output, N is the number of employed workers, E is the amount of energy resources used in the economy, pg is the price of energy, to is the nominal wage, PE is the expected price level, P is the price level, n is the unemployment rate, U is the number of unemployed workers, L is the size of the labor force, and z is our catch-all variable for other labor market conditions. NOTE: be careful to distinguish energy prices 175 from expected aggregate prices 4F"3 Production function: K: II 31 El Wage Setting relationship: 3 II "P. KIN Price setting relationship 1 P =(1+ m)w%pg Unemployment rate: uE _L Unemployment level: U=LN 1. Let x = pE/P be the real price of energy. Derive an expression for the real wage in the price setting relationship as a function of the markup and the real price of energy m. 2. Will the natural rate of unemployment change if the real price of energy goes up? If so, how? If not, why not? Show your work. 3. Derive the AS curve as a function of m, :3, PE, 2, Y, E, and L. Show your work. HINT: it will help to start with your real wage expression from part 1). 4. Suppose that the economy starts off in medium run equilibrium. Provide an AS-AD graph that demonstrates the effects of an increase in the real price of energy. Clearly label/explain all curves, points, shifts, etc