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.

Economics

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Economics