7 (9.3) This exercise considers a labor market described by the following wage-setting (WS)and price-setting (PS) relations:WS: W = P × (1 – Vu) × zPS : P= (1+ m) × W,%3Dwith z =1 and m =5W(a) Calculate the equilibrium real wageUn. Plot the WS and PS relations in (u, )-space.and the natural rate of unemploymentP(b) Suppose the markup m doubles (e. g., due to an oil embargo which causes pro-ducer prices to rise). Recalculate equilibrium real wage and the natural rate ofunemployment. Add the impact of this change in m to the diagram from (a).(c) By how much does the variable z have to change (e.g., due to a change inunemployment benefits) such that in the situation in (b), i. e., with m =the natural rate of unemployment is equal to the natural rate of unemploymentin (a)? Add the impact of this change in z to the diagram from (b).2

Wage Setting relation: W = Pe (1- u0.5) z Price Setting relation : P = (1+m ) *W At the natural…

(9.3) This exercise considers a labor market described by the following wage-setting (WS) and price-setting (PS) relations: WS: W = P × (1 – Vu) × z PS : P= (1+ m) × W, with z = 1 and m = (a) Calculate the equilibrium real wage P W and the natural rate of unemployment Plot the WS and PS relations in (u, W)-space.