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.

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:

Labour market tightness

Labour force

The unemployment rate

The vacancy rate

The number of firms

Aggregate output