This question examines the search and unemployment model.

1. Draw and carefully label the two graphs depicting the equilibrium in the model.

2. Suppose there is a technological change that reduces the cost of recruiting for firms. Determine the effects on:

(a) labour market tightness

(b) the unemployment rate

(c) the vacancy rate

(d) aggregate output

3. One of your classmates argues that a change in the employment benefit compensation b will shift the Beveridge curve to the right. Do you agree with this statement? Explain.