Let the aggregate production function simply be Y = N where Y = output, N = employment. Suppose the price-setting equation is P = ( 1 + m ) W where m is firms' markup over marginal cost (W) and the wage-setting equation is W = Pe ( 1 + (1 - 100 u ) + z ) where u is the unemployment rate, W is the nominal wage, Pe is the expected price level and z represents other factors affecting wage bargains. NB: In the medium run equilibrium, Pe = P. a. Explain the intuition behind the price-setting and wage-setting equations in the medium run. Draw these equations in a WS-PS diagram. (2 marks ) Assume =1, =1 =1 b. What is the real wage as determined by the price-setting equation? (1 mark) c. What is the natural rate of unemployment un? (1 mark) d. Using your answer in c., with the production function Y=N (or output = employment) and unemployment defined as u=1-N/L where L is the labour force with L=200, compute the natural level of employment, Nn, and the natural level of output, Yn. (2 marks) e. What happens to the real wage, the natural rate of unemployment and the natural levels of employment and output if the labor force reduces to 100? (1 mark) f. A change in m: What happens to the real wage, the natural rate of unemployment and the natural levels of employment and output if the markup, m, increases to 1.5 (with L=100)? Illustrate in the WS-PS diagram. (2 marks) g. A change in z: Suppose new robot technologies are introduced designed to substitute for people in jobs. What will happen to workers' relative bargaining power? Interpret this as a 10% change in z. What will happen to the WS and PS curves and to the real wage and the natural rate of unemployment? Explain. Use the same parameters as the original question (before any other changes). (3 marks)