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Can anyone suggest the way to do d following problem.....tellling me d method would suffice
n full answers r appreciated :)
Consider an economy where the nominal wage rate is set by a process
of wage bargaining between the workers and the producers before actual
production takes place. Thus at any period t, the nominal wage rate (Wt)
is a function of the expected price level (Pt
e ), the rate of unemployment
(ut) and the average productivity of the workers (At). The exact functional
relationship is given below:
Wt = Pe
t F(ut;At); Fu < 0; FA > 0
EEE 2012 A 01 20
Once the nominal wage is determined, the producers set the actual price level
(Pt) as a constant mark up () over the nominal wage rate: Pt = (1 + )Wt.
De ne the actual rate of in
ation as t = PtPt1
Pt1
and the expected rate of
in
ation as e
t = Pe
t Pt1
Pt1
QUESTION 51. Given the above wage and price setting equations, derive
the relationship between expected rate of in
ation and actual rate of in
ation.
Which of the following equations represents this relationship?
(a) t = (1 + e
t )[F(ut;At) ] 1
(b) t = (1 + e
t )(1 + )F(ut;At) 1
(c) t = e
t (1 + )F(ut;At)
(d) None of the above
Answer: (b)
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