Graphically illustrate (using the WS and PS relations) and explain the effects of an increase in the markup on the equilibrium real wage, the natural rate of unemployment, the natural level of employment, and the natural level of output
What will be an ideal response?
An increase in the markup will cause firms to raise the price given the nominal wage. This will cause the real wage based on price setting behavior to decrease; this is represented by a downward shift in the PS curve. This reduction in the real wage will also occur with an increase in the unemployment rate. So, the natural rate of unemployment will rise and the natural level of employment and, therefore, output will fall. The equilibrium real wage will also be lower.
You might also like to view...
Long-run equilibrium will occur at the price level at which
A) the aggregate demand and long-run aggregate supply curves intersect. B) the short-run aggregate supply and long-run aggregate supply curves intersect. C) the long-run aggregate demand and short-run aggregate supply curves intersect. D) the aggregate demand and short-run aggregate supply curves intersect.
When GDP = $2.5 trillion, C = $1.0 trillion, I = $0.6 trillion, G = $0.4 trillion, and NX = $0. Then
A) unplanned inventory change = -$0.5 trillion. B) equilibrium expenditure = $2.0 trillion. C) aggregate planned expenditure = $1.6 trillion. D) unplanned inventory change = $0.5 trillion. E) aggregate planned expenditure = $2.5 trillion.