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.
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If market prices help inform individuals about the relative scarcities of goods and services, then abolishing market prices would
A) finally allow people to overcome scarcity. B) eliminate important information. C) abolish the dog-eat-dog mentality of market competition. D) tend to create permanent surpluses of most goods. E) accomplish all of the above.
In face of a negative supply shock, the Fed may avoid a rise in unemployment only if it is willing to increase the rate of inflation
Indicate whether the statement is true or false
If consumer purchases of a good are not very sensitive to the price of the good, economists say the demand for the good is relatively
a. inelastic. b. elastic. c. robust. d. inverse.
Which of the following statements is true?
A. Focusing on incremental costs is a bad idea for managers. B. Fixed cost is the same thing as variable cost. C. Costs look the same from all perspectives. D. Incremental cost is the same thing as marginal cost.