3. Given the linear wage setting equation wwS (yt) = B + a(¥ – Ye) + zw in which B is aconstant reflecting the unemployment benefit and the disutility of work, and z, is the set ofwage-push factors, and using the price-setting rule P = (1+ µ)W/A in which u is pricemark-up and d is productivity. Consider an increase in employment above the equilibriumlevel due to a positive aggregate demand shock. Explain (mathematically) how this shocksaffects inflation. Are the assumptions you made in this derivation realistic? Explain.(100 words, 1 equation = 1 word)

Given wage setting equation: Price setting Rule:We have a wage-setting equation ,reflecting…

= Given the linear wage setting equation wWS (yt): B+ a(yt-ye) + Zw in which B is a constant reflecting the unemployment benefit and the disutility of work, and zw is the set of wage-push factors, and using the price-setting rule P = (1 + µ)W/A in which is price mark-up and X is productivity. Consider an increase in employment above the equilibrium level due to a positive aggregate demand shock. Explain (mathematically) how this shocks affects inflation. Are the assumptions you made in this derivation realistic? Explain.

= Given the linear wage setting equation wWS (yt): B+ a(yt-ye) + Zw in which B is a constant reflecting the unemployment benefit and the disutility of work, and zw is the set of wage-push factors, and using the price-setting rule P = (1 + µ)W/A in which is price mark-up and X is productivity. Consider an increase in employment above the equilibrium level due to a positive aggregate demand shock. Explain (mathematically) how this shocks affects inflation. Are the assumptions you made in this derivation realistic? Explain.

Microeconomics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506893

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter13: Earnings, Productivity, And The Job Market

Section: Chapter Questions

Problem 11CQ

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