Suppose that the firms' markup over costs is 5% and the wage setting relation isW = P (1-u+z2); Where u is the unemployment rate; z is the reservation wage
i) If u is 15%, what is the reservation wage as determined by the wage setting equation?
ii) What is the real wage?
iii) Suppose the mark-up increases to 10%. What happens to the naturalrate of unemployment for the same reservation wage?
iv) Is the word "natural" in the natural rate of unemploymentappropriate? Why or why not? Describe in less than 5 sentences