Question 4 [25 marks]

Briefly explain how and why each of the following changes would affect the natural rate of unemployment in an economy:

(a) A decrease in unemployment benefits; (5)

(b) An increase in the minimum wage; (5)

(c) Assume a technological advance leads to lower production costs within an economy.

Show the effect this will have on national income, unemployment, inflation, and interest rates with the help of an AD-AS diagram, assuming completely flexible wage rates.