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Suppose the wage-setting equation is given by

W = Pe(a0-a1*u + a2*z); where a0, a1 and a2 are positive parameters.

The price-setting equation is P = (1 + m)W:

(1) What would be the natural level of unemployment Yn? How does it depend on a0, a1 and a2? What?s the economic intuition?

(2) How does the natural rate of unemployment depend on a0, a1, a2 and z?

(3) What is the equation for the AS curve? What restrictions on the parameters do we need to ensure that AS curve has a positive and ?nite slope? What are the economic intuitions for these restrictions?

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M941203

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