The wage determination equation is given by: = e(1 -u )

We know that goods are produced according to production function of the form: =

and average markup in the economy equals 10%. Using this information solve following problems:

a) Find price-setting equation

b) Present price-setting and wage-setting relation graphically and mark natural rate of unemployment.

c) Find natural rate of unemployment.

d) Show how natural rate of unemployment change if average markup increases by 10 pp. (graphical solution is required)

e) Find AS curve, if labor force equals 11.

f) Find natural level of output. (only numerical solution is required)

g) Present how increase in expected level of prices affects AS curve (only graphical solution is required)