Suppose that the markup of goods prices over marginal cost is 5%, and that the wage-setting equation is W = P(1 − u) where u is the unemployment rate. 1. What is the real wage, as determined by the price-setting equation? 2. What is the natural rate of unemployment? 3. Suppose that the markup of prices over costs increases to 10%. What happens to the natural rate of unemployment? Explain the logic behind your answer.
