Module 2b

Question 1

What is the equation for real wage wage setting? What does this imply regarding their relationship between unemployment rate?

Answer 1

W/P = F(u,z). The relationship between real wage and unemployment rate is negative. This implies that if there is a lower unemployment rate, there are higher wages as workers have higher bargaining power for wage setting and vice versa

Question 2

Given the negative relationship between wage and unemployment rate, what would the WS curve look like in a graph? What are its implications to this?

Answer 2

It would be downward sloping. This would mean that the relationship between wage and unemployment is negative, implying that when there is an increase in unemployment rate, the wages would decrease and vice versa

Question 3

What would the PS curve look like in a graph? What are its implications for this with markup?

Answer 3

It would be horizontal since it is independent from unemployment rate

Question 4

What is the equation for price for price setting? What does this imply regarding their relationship between markup wage and price?

Answer 4

W/P = 1/1+µ. This would mean that when markup increases, price increases while real wage would decrease and vice versa.

Question 5

The price setting depends on the unemployment rate. True or False? Why?

Answer 5

False. Real wage/Price does not depend on the unemployment rate (u)

Question 6

Wages set by workers must be equal to the price set by firms. True or False? Why?

Answer 6

True because WS and PS must be at equilibrium for wage negotiations

Question 7

Natural unemployment would happen when price is equal to expected price. True or False?

Answer 7

True

Question 8

What would affect the WS curve to shift?

Answer 8

The catch all variable z. It would shift upward when there is an increase in z and vice versa