Question 1: Suppose that the markup of goods over wages, μ, is 10% (0.1) and that the wage setting equation is W = P(1-2u + z) where u is the unemployment rate and z is 10% (0.1).
a) What is the real wage, as determined by the price setting equation? (5 points)
b) Solve for the natural rate of unemployment. (5 points)
c) Solve for the natural rate of unemployment if z falls to 5% (0.05) (5 points)
d) Show the change from b to c on a wage setting-price setting diagram. (5 points)