(a) Suppose the natural rate of unemployment for the economy is 5 percent and the economy is currently experiencing an 8 percent unemployment rate. Explain what will likely happen to wages and prices as the economy adjusts to the long-run equilibrium. (b) Using the information below, explain the adjustments that will be taken by firms and workers to move the economy to a long-run equilibrium, specifically in terms of costs of production, real and nominal wages, and prices of products. Assume that firms and workers have adaptive expectations. The current unemployment rate = 4%. The natural rate of unemployment = 5%. Last year's inflation rate = 2%. This year's inflation rate = 3%. (c) The workers in the oil and gas industry in Alberta are paid an average of $68.50 per hour, and through their collective bargaining agreement, they have incorporated a 3.5 percent annual raise in their contracts to account for anticipated inflation. Suppose there is unexpected inflation of 2.8% percent instead. Explain how this will affect the real wages of these workers and the unemployment rate of these workers.
(a) Suppose the natural rate of
(b) Using the information below, explain the adjustments that will be taken by firms and workers to move the economy to a long-run equilibrium, specifically in terms of costs of production, real and nominal wages, and prices of products. Assume that firms and workers have adaptive expectations.
The current unemployment rate = 4%.
The natural rate of unemployment = 5%.
Last year's inflation rate = 2%.
This year's inflation rate = 3%.
(c) The workers in the oil and gas industry in Alberta are paid an average of $68.50 per hour, and through their collective bargaining agreement, they have incorporated a 3.5 percent annual raise in their contracts to account for anticipated inflation. Suppose there is unexpected inflation of 2.8% percent instead. Explain how this will affect the real wages of these workers and the unemployment rate of these workers.
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