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The natural rate of unemployment Suppose that the markup of goods prices over marginal cost is 5%, and that the wagesetting equation is W=P(1u), 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 markup of prices over costs increases to 10%. What happens to the natural rate of unemployment? Explain the logic behind your answer. 4. The existence of unemployment a. Why does the wage-setting relation in Figure 1 have an upward slope? As N approaches L, what happens to the unemployment rate? b. The price-setting relation is horizontal. How would an increase in the mark-up affect the position of the price-setting relation in Figure 1? How would an increase in the mark-up affect the natural rate of unemployment in Figure 1 ? Figure 1 Wage and Price Setting and the Natural Level of Employment P.172 Textbook (8th edition)