Suppose the economy is characterised by the following equations: Price setting: P = (1+m) (W/A) Wage setting: W = Ae P e (1-u) where A is the unobserved and difficult to estimate technology parameter in the production function Y=AN, and Ae is its expected value. First suppose that expectations of both prices and technology are accurate.

1. Solve for the natural rate of unemployment and medium-run real wage rate if the mark-up, m, is equal to 25 per cent and A = 10