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Suppose that the markup of the goods price over marginal cost is 10%, and that the wage-setting equations is W = P(1-2u + z) where u is the unemployment rate and z is the unemployment benefit.

(a) What is the real wage, as determined by the price-setting equation?

(b) Solve for the natural rate of unemployment.

(c) What happens to the natural rate of unemployment if z rises from 5% to 10%? Briefly explain your answer.

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