ANSWER ALL!

This question examines the DMP model of search and unemployment seen in class. Recall that the two equations determining equilibrium in this model are given by: (Q) = b + e[m(1, j)]a[z b], em 1, 1 j = k (1 a)(z b)

1. Explain what decisions firms in the DMP model make, and how they make them.

2. Draw and carefully label the two graphs depicting equilibrium in the model.

3. How will a decrease in the benefit b affect the equilibrium market tightness j, the unemployment rate, the vacancy rate and the aggregate output? Explain intuitively.

4. How will a decrease in the productivity z affect the equilibrium market tightness j, the unemployment rate, the vacancy rate and the aggregate output? Explain intuitively.

5. How will an increase in the cost of recruting k affect the equilibrium market tightness j, the unemployment rate, the vacancy rate and the aggregate output? Explain intuitively.