(a)The shape of ERU curve depends on the definition of the real wage. Using appropriate diagrams,...

(a)The shape of ERU curve depends on the definition of the real wage. Using appropriate diagrams, describe the two definitions of the real wage that brings about the differences in the shape of the ERU curve.

(b) Using AD-BT-ERU and WS-PS diagrams, analyze the following shocks to the equilibrium unemployment, real exchange rate, trade balance, and real wage
(W/Pc).
(i) A rise in mark-up due to weaker competition policy rules.
(ii) An increase in union bargaining power.
(iii) An increase in world output.

Expert Solution

A. The shape of ERU curve depends on the definition of the real wage. Using appropriate diagrams, describe the two definitions of the real wage that brings about the differences in the shape of the ERU curve.

Ans- First lets understand what is ERU curve- The ERU curve can be defined as the combinations of the real exchange rate and output at which the wage-setting real wage is equal to the price-setting real wage. At any point on the ERU curve, the real exchange rate, Î¸, is constant and inflation is constant.

2. WS curve shifts downwards: workers will bargain for a lower wage ceteris paribus and therefore the wage-setting curve shifts down. b) PS curve shifts downwards; the mark up rises. c) PS curve shifts downwards; the tax wedge rises, reducing the real wage for workers.

Rahul Sunny answered 2 years ago

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