Question

Graphically illustrate (using the WS and PS relations) and explain the effects of an increase in the markup on the equilibrium real wage, the natural rate of unemployment, the natural level of employment, and the natural level of output

Answer 1

When the markup increases, real wage decreases and because of the decrease or the now low real wage the demand for labor at a low cost decreases which leads to a increase in the natural rate of unemployment. In addition the natural rate of unemployment has an inverse relationship with the natural level of employment, therefore, the natural rate of employment will decrease. And the output level will decrease.

Step-by-step explanation:

See attached picture:

The decrease in real wage is shown by the movement from W/P to W/P'.

The increase in the natural rate of unemployment is shown by the movement from Un to Un' and the new equilibrium is at B.