Economics Homework Help

a.

1. Describe the two possible effects that an increase in the wage rate can have on labor supply. Which effect do you expect to dominate under normal circumstances?
2. Consider that the labor market is characterized by the following two equations:

The wage setting equation:

where W = nominal wage; P^e = expected price; u = unemployment; z = other factors of wage determination.

The price setting equation: ,

where P = price level; m = markup.

Explain why the nominal wage is a function of the expected price. Draw the curves representing the two equations above, label the axes, and indicate the implied natural rate of unemployment. What happens to the wage rate and the actual price level when the expected price increases? Explain.

c. The original Phillips curve can be represented by the following equation:

where is the inflation rate, u is the unemployment, is a coefficient; m is the markup and z represents relevant structural features of the economy.

• Provide an interpretation of the relationship represented by the equation. Plot the Phillips curve on a graph.
• While this relationship held pretty well in the 1960s, it broke down starting from the 1970s. What caused this breakdown? How did the inflation-unemployment relationship change in the post-1970s? Explain verbally; no need for mathematical illustration/equations.