Question 2 [10 pts] This question examines the Diamond-Mortensen Pissarides model of search and unemployment seen in class. Recall that the two equations determining equilibrium in this model are given by:

v(Q)= b + em(1, j) a ( z-b) and em (1/j,1) = k/(1-a)(z-b)

1. Draw and carefully label the two graphs depicting equilibrium in the model. [4 pts]

2. Suppose that there is a technological change that reduces the costs of recruiting for firms. Use the DMP model to determine the effects on: [6 pts]

i. Labour market tightness

ii. Labour force

iii. The unemployment rate

iv. The vacancy rate

v. The number of firms

vi. Aggregate output